FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ][X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31,JUNE 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-11718
MANUFACTURED HOME COMMUNITIES, INC.
(Exact name of registrant as specified in its Charter)
MARYLAND 36-3857664
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
incorporation or organization) No.)
TWO NORTH RIVERSIDE PLAZA, SUITE 800, CHICAGO, ILLINOIS 60606
(Address of principal executive offices) (Zip Code)
(312) 279-1400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( )
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
22,894,52522,829,411 shares of Common Stock as of May 6, 2004.August 9, 2004
MANUFACTURED HOME COMMUNITIES, INC.
TABLE OF CONTENTS
PART I - FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
----
Consolidated Balance Sheets as of March 31,June 30, 2004 (unaudited) and December 31, 2003.........................2003..................... 3
Consolidated Statements of Operations for the quarters and six months ended
March 31,June 30, 2004 and 2003 (unaudited)............................................................................ 4
Consolidated Statements of Cash Flows for the quarterssix months ended
March 31,June 30, 2004 and 2003 (unaudited)............................................................................ 6
Notes to Consolidated Financial Statements.................................................................Statements............................................................ 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................ 21Operations................................................................... 19
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.........................................Risk.................................... 30
ITEM 4. Controls and Procedures............................................................................Procedures....................................................................... 30
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings..................................................................................Proceedings............................................................................. 30
ITEM 6. Exhibits and Reports on Form 8-K...................................................................8-K.............................................................. 30
2
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31,JUNE 30, 2004 AND DECEMBER 31, 2003
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31JUNE 30,
2004 DECEMBER 31,
(UNAUDITED) 2003
--------------- ------------------------- ------------
ASSETS
Investment in real estate:
Land....................................................................Land $ 369,267423,578 $ 282,803
Land improvements....................................................... 1,173,2161,308,618 911,176
Buildings and other depreciable property................................ 122,289123,421 121,117
--------------- -------------
1,664,772----------- -----------
1,855,617 1,315,096
Accumulated depreciation................................................ (283,155)(295,752) (272,497)
--------------- ------------------------ -----------
Net investment in real estate......................................... 1,381,6171,559,865 1,042,599
Cash and cash equivalents.................................................. 17,4239,426 325,740
Notes receivable........................................................... 12,19312,872 11,551
Investment in and advances to joint ventures............................... 50,588ventures............................................... 50,748 18,828
Rents receivable, net...................................................... 2,4542,085 2,385
Deferred financing costs, net.............................................. 14,83615,023 14,164
Inventory.................................................................. 33,44339,662 31,604
Prepaid expenses and other assets.......................................... 39,22738,152 27,044
--------------- -------------
Total assets............................................................----------- -----------
TOTAL ASSETS............................................................ $ 1,551,7811,727,833 $ 1,473,915
=============== ======================== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.................................................. $ 1,307,1751,417,092 $ 1,076,183
Unsecured line of credit................................................ 35,00063,000 --
Other notes payable..................................................... 113 113
Accounts payable and accrued expenses................................... 34,15138,124 27,815
Accrued interest payable................................................ 7,5268,118 5,978
Rents received in advance and security deposits......................... 19,20418,539 6,616
Distributions payable................................................... 441472 224,696
--------------- -------------
Total liabilities..................................................... 1,403,610----------- -----------
TOTAL LIABILITIES..................................................... 1,545,458 1,341,401
--------------- ------------------------ -----------
Commitments and contingenciescontingencies.............................................. -- --
Minority interest - Common OP Units and other.............................. 9,28217,472 1,716
Minority interest - Perpetual Preferred OP Units........................... 125,000 125,000
Stockholders' equity:STOCKHOLDERS' EQUITY:
Preferred stock, $.01$0.01 par value
10,000,000 shares authorized; none issued............................. -- --
Common stock, $.01$0.01 par value
50,000,000 shares authorized; 22,881,03822,745,991 and 22,563,348
sharesShares issued and outstanding for 2004 and 2003, respectively......... 223 222
Paid-in capital......................................................... 266,383291,943 263,066
Deferred compensation................................................... (412)(330) (494)
Distributions in excess of accumulated earnings......................... (252,305)(251,933) (256,996)
--------------- -------------
Total stockholders' equity............................................ 13,889----------- -----------
TOTAL STOCKHOLDERS' EQUITY............................................ 39,903 5,798
--------------- -------------
Total liabilities and stockholders' equity..............................----------- -----------
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $ 1,551,7811,727,833 $ 1,473,915
=============== ======================== ===========
The accompanying notes are an integral part of the financial statements.
3
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS AND SIX MONTHS ENDED MARCH 31,JUNE 30, 2004 AND 2003
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
MARCH 31, MARCH 31,QUARTERS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2004 2003 ------------- -------------2004 2003
--------- --------- ---------- ---------
PROPERTY OPERATIONS:
Community base rental income..........................................income.......................... $ 50,82352,854 $ 49,36149,111 $ 103,665 $ 98,472
Resort base rental income............................................. 12,425 4,077income............................. 12,952 1,854 25,294 5,931
Utility and other income.............................................. 6,526 5,331
------------- -------------income.............................. 6,440 5,091 12,954 10,422
--------- --------- ---------- ---------
Property operating revenues....................................... 69,774 58,769revenues....................... 72,246 56,056 141,913 114,825
Property operating and maintenance.................................... 21,014 16,727maintenance.................... 23,769 15,818 44,728 32,545
Real estate taxes..................................................... 5,507 4,638taxes..................................... 6,055 4,745 11,555 9,383
Property management................................................... 2,846 2,351
------------- -------------management................................... 3,423 2,276 6,269 4,628
--------- --------- ---------- ---------
Property operating expenses....................................... 29,367 23,716
------------- -------------expenses....................... 33,247 22,839 62,552 46,556
--------- --------- ---------- ---------
Income from property operations................................... 40,407 35,053operations................... 38,999 33,217 79,361 68,269
HOME SALES OPERATIONS:
Gross revenues from inventory home sales.............................. 7,538 4,092sales.............. 10,783 9,567 18,321 13,659
Cost of inventory home sales.......................................... (7,016) (3,461)
------------- -------------sales.......................... (9,346) (8,166) (16,362) (11,626)
--------- --------- ---------- ---------
Gross profit from inventory home sales............................ 522 631sales............ 1,437 1,401 1,959 2,033
Brokered resale revenues, net......................................... 492 376net......................... 596 454 1,088 830
Home selling expenses................................................. (2,073) (1,894)expenses................................. (2,204) (1,808) (4,277) (3,702)
Ancillary services revenues net...................................... 912 482
------------- -------------
Loss(losses), net............. 735 (111) 1,647 371
--------- --------- ---------- ---------
Income (loss) from home sales and other.................................... (147) (405)other........... 564 (64) 417 (468)
OTHER INCOME AND EXPENSES:(EXPENSES):
Interest income....................................................... 453 261income....................................... 314 244 767 505
Income from unconsolidated joint ventures and other................... 1,258 589other... 2,170 550 3,428 1,139
General and administrative............................................ (2,212) (1,932)administrative............................ (2,367) (2,000) (4,579) (3,932)
Interest and related amortization..................................... (20,393) (12,393)amortization..................... (23,268) (12,652) (43,643) (25,045)
Depreciation on corporate assets...................................... (377)assets...................... (427) (310) (804) (620)
Depreciation on real estate assets and other costs.................... (10,682) (8,904)costs.... (12,305) (9,687) (22,974) (18,591)
Gain on sale of propertiesreal estate and other..................................other................. -- -- 638 ---
------------- ---------------
--------- --------- ---------- ---------
Total other income and expenses................................... (31,315) (22,689)
------------- -------------(expenses)..................... (35,883) (23,855) (67,167) (46,544)
--------- --------- ---------- ---------
Income before allocation to Minority Interests.................... 8,945 11,959minority interests and
discontinued operations........................... 3,680 9,298 12,611 21,257
MINORITY INTERESTS:
(Income)Income allocated to Common OP Units................................. (1,156) (1,776)
(Income)Units................... (181) (1,373) (1,337) (3,149)
Income allocated to Perpetual Preferred OP Units....................Units...... (2,821) (2,813) (2,813)
------------- -------------(5,634) (5,626)
--------- --------- ---------- ---------
Income from continuing operations................................. 4,976 7,370operations................. 678 5,112 5,640 12,482
DISCONTINUED OPERATIONS:
Discontinued operations............................................... --- 502
Depreciationoperations............................... (20) 533 (6) 906
Gain on sale of discontinued property................. -- 10,826 -- 10,826
Minority interest on discontinued operations............................... --- (129)
Minority interests on discontinued operations......................... --- (71)
------------- -------------operations.......... -- (2,071) -- (2,142)
--------- --------- ---------- ---------
Income (loss) from discontinued operations............................... --- 302
------------- -------------operations........ (20) 9,288 (6) 9,590
--------- --------- ---------- ---------
NET INCOME AVAILABLE FOR COMMON SHARES............................SHARES................... $ 4,976658 $ 7,672
============= =============14,400 $ 5,634 $ 22,072
========= ========= ========== =========
The accompanying notes are an integral part of the financial statements.
4
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE QUARTERS AND SIX MONTHS ENDED MARCH 31,JUNE 30, 2004 AND 2003
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
MARCH 31,QUARTERS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ------------------------
2004 MARCH 31, 2003 -------------- --------------2004 2003
-------- -------- -------- --------
EARNINGS PER COMMON SHARE - BASIC:
Income from continuing operations.....................................operations ................ $ .220.03 $ .340.23 $ 0.25 $ 0.56
Income from discontinued operations...................................operations .............. -- .01
------------- -------------0.42 -- 0.44
-------- -------- -------- --------
Net income available for Common Shares................................Shares............. $ .220.03 $ .35
============= =============0.65 $ 0.25 $ 1.00
======== ======== ======== ========
EARNINGS PER COMMON SHARE - FULLY DILUTED:
Income from continuing operations.....................................operations.................. $ .210.03 $ .330.23 $ 0.24 $ 0.56
Income from discontinued operations...................................operations................ -- .01
------------- -------------0.41 -- 0.42
-------- -------- -------- --------
Net income available for Common Shares................................Shares............. $ .210.03 $ .34
============= =============0.64 $ 0.24 $ 0.98
======== ======== ======== ========
Distributions declared per Common Share outstanding...................Shares
Outstanding.................................... $ .01250.0125 $ . 495
============= =============0.495 $ 0.025 $ 0.99
======== ======== ======== ========
Weighted average Common Shares outstanding -
basic.................... 22,674 21,918
============= =============Basic.......................................... 22,737 22,027 22,706 21,973
======== ======== ======== ========
Weighted average Common Shares outstanding -
fully diluted............ 28,521 27,740
============= =============diluted.................................. 29,142 27,965 28,840 27,853
======== ======== ======== ========
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
QUARTERS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2004 2003 2004 2003
----- -------- -------- --------
Net income available for Common Shares.................. $ 658 $ 14,400 $ 5,634 $ 22,072
Net unrealized holding gains on derivative
instruments .................................. -- 341 -- 492
----- -------- -------- --------
Net comprehensive income ............................... $ 658 $ 14,741 $ 5,634 $ 22,564
===== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
5
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERSSIX MONTHS ENDED MARCH 31,JUNE 30, 2004 AND 2003
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
MARCH 31, MARCH 31,JUNE 30, JUNE 30,
2004 2003
------------- ----------------------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................ $ 4,9765,634 $ 7,67222,072
Adjustments to reconcile net income to
cash provided by operating activities:
Income allocated to Minority Interests............................ 3,969 4,6606,971 10,918
Gain on sale of propertiesreal estate and other..............................other............................. (638) ---(10,697)
Depreciation and amortization expense............................. 11,584 9,567
Equity in income ofexpense ............................ 24,777 19,659
Income from unconsolidated joint ventures................. (740) (584)ventures......................... (2,405) (1,127)
Amortization of deferred compensation and other................... 641 1,2711,324 980
Increase in provision for uncollectible rents receivable.......... 133 157102 89
Changes in assets and liabilities:
Decrease (increase) in rents receivable........................... 345 (152)
Increase in inventory............................................. (702) (1,987)
Increase in prepaidRents receivable.................................................. 745 (574)
Inventory......................................................... (6,863) (967)
Prepaid expenses and other assets..................... (2,826) (595)
Increase in accountsassets................................. (1,953) (3,586)
Accounts payable and accrued expenses................. 1,315 575
Increase in rentsexpenses............................. 7,003 (83)
Rents received in advance and security deposits....... 3,024 2,512
------------- -------------deposits................... (1,644) 629
---------- ---------
Net cash provided by operating activities............................. 21,081 23,096
------------- -------------33,053 37,313
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of rental properties...................................... (100,900) ---(137,504) --
Proceeds from disposition of asset....................................assets................................... 671 27,083
(Investments in) distributions from joint ventures.................... (31,316) 341(30,080) 688
Funding of notes receivable........................................... (611) (688)(1,290) (545)
Improvements:
Improvements - corporate.......................................... (118) (78)(200) (72)
Improvements - rental properties.................................. (2,674) (3,017)(6,509) (6,207)
Site development costs............................................ (2,571) (1,491)
------------- -------------(5,695) (3,330)
---------- ---------
Net cash used in(used in) provided by investing activities................................. (137,519) (4,933)
------------- -------------activities................... (180,607) 17,617
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock optionsIssuance of common and employee stock purchase plan...... 3,529 1,620
Distributions to Common Stockholders, Common OP Unitholders and
Perpetual Preferred OP Unitholders................................ (227,420) (15,896)preferred stock................................ 4,673 4,705
Collection of principal payments on employee notes.................... 1,279-- 2,713
Line of credit:
Proceeds.......................................................... 50,000 15,00081,000 27,000
Repayments........................................................ (15,000) (13,000)(18,000) (57,650)
Refinancings - net proceeds (repayments).............................. -- 13,974
Principal payments.................................................... (1,793) (1,230)(3,926) (2,755)
Distributions......................................................... (230,586) (32,395)
Debt issuance costs................................................... (1,195) (461)
------------- -------------(1,921) (302)
---------- ---------
Net cash used in financing activities................................. (191,879) (12,688)
------------- -------------(168,760) (44,710)
---------- ---------
Net (decrease) increase in cash and cash equivalents....................... (308,317) 5,475(316,314) 10,220
Cash and cash equivalents, beginning of period............................. 325,740 7,270
------------- ----------------------- ---------
Cash and cash equivalents, end of period................................... $ 17,4239,426 $ 12,745
============= =============17,490
========== =========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest................................... $ 18,29441,475 $ 12,275
============= =============25,651
========== =========
The accompanying notes are an integral part of the financial statements.
6
MANUFACTURED HOME COMMUNITIES, INC.
DEFINITION OF TERMS:
Manufactured Home Communities, Inc., together with MHC Operating Limited
Partnership (the "Operating Partnership") and other consolidated subsidiaries
("Subsidiaries"), are referred to herein as the "Company", "MHC", "we", "us",
and "our". The company Capitalized terms used but not defined herein are as
defined in the Company's Annual Report on Form 10-K (the "2003 Form 10-K") for
the year ended December 31, 2003.
PRESENTATION:
These unaudited Consolidated Financial Statementsinterim consolidated financial statements of MHC, a
Maryland corporation, have been prepared pursuant to the Securities and Exchange
Commission ("SEC") rules and regulations and should be read in conjunction with
the financial statements and notes thereto included in the 2003 Form 10-K. The
following Notesnotes to Consolidated Financial Statementsconsolidated financial statements highlight significant
changes to the Notesnotes included in the 2003 Form 10-K and present interim
disclosures as required by the SEC. The accompanying Consolidated Financial
Statementsconsolidated financial
statements reflect, in the opinion of management, all adjustments necessary for
a fair presentation of the interim financial statements. All such adjustments
are of a normal and recurring nature. Certain reclassifications have been made
to the prior periods' financial statements in order to conform with current
period presentation.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Consolidation
The Company consolidates its majority owned subsidiaries in which it has
the ability to control the operations of the subsidiaries and all variable
interest entities for which the Company is the primary beneficiary. All
inter-company transactions have been eliminated in consolidation. The Company's
acquisitions were all accounted for as purchases in accordance with Statement of
Financial Accounting Standards No. 141 "Business Combinations".
In JanuaryDecember 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46,46R, Consolidation of Variable Interest Entities - an
interpretation of ARB 51 ("FIN 46"46R"). The objective of FIN 4646R is to provide
guidance on how to identify a variable interest entity ("VIE") and determine
when the assets, liabilities, non-controlling interests, and results of
operations of a VIE need to be included in the company's consolidated financial
statements. A company that holds variable interests in an entity will need to
consolidate such entity if the company absorbs a majority of the VIE's expected
losses or receives a majority of the entity's expected residual returns if they
occur, or both. The adoption of FIN 4646R had no effect on the Company.
(b) Use of Estimates
The preparation of financial statements, in conformity with U.S. generally
accepted accounting principles generally accepted in the United States("US GAAP"), requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(c) Segments
We manage all our operations on a property by propertyproperty-by-property basis. Since each
property has similar economic and operational characteristics the Company has
one reportable segment, which is the operation of manufactured home communities.
The distribution of the Properties throughout the United States reflects our
belief that geographic diversification helps insulate the portfolio from
regional economic influences. We intend to target new acquisitions in or near
markets where the Properties are located and will also consider acquisitions of
properties outside such markets.
7
MANUFACTURED HOME COMMUNITIES, INC.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d) Inventory
Inventory consists of new and used manufactured homes, and is stated at
the lower of cost or market after consideration of the N.A.D.A. (National
Automobile Dealers Association) Manufactured Housing Appraisal Guide and the
current market value of each home included in the manufactured home inventory.
Inventory sales revenues and resale revenues are recognized when the home sale
is closed. Resale revenues are stated net of commissions paid to employees of
$256,000$573,000 for the quartersix months ended March 31,June 30, 2004.
(e) Real Estate
In accordance with SFAS No. 141, the Company allocates the purchase price
of real estate to land, land improvements, buildingbuildings and, if determined to be
material, intangibles, such as the value of above, below and at-market leases
and origination costs associated with the in-place leases. We depreciate the
amount allocated to land improvements, buildingbuildings and other intangible assets
over their estimated useful lives, which generally range from three to thirty
years. The values of the above and below market leases are amortized and
recorded as either an increase (in the case of below market leases) or a
decrease (in the case of above market leases) to rental income over the
remaining term of the associated lease. The value associated with in-place
leases is amortized over the expected term, which includes an estimated
probability of lease renewal. Expenditures for ordinary maintenance and repairs
are expensed to operations as incurred, and significant renovations and
improvements that improve the asset and extend the useful life of the asset are
capitalized and then expensed over their estimated useful life.
We evaluate our Properties for impairment when conditions exist which may
indicate that it is probable that the sum of expected future cash flows
(undiscounted) from a Property over the anticipated holding period is less than
its carrying value. Upon determination that a permanent impairment has occurred,
the applicable Property is reduced to fair value. For the quarterssix months ended March
31,June
30, 2004 and 2003, permanent impairment conditions did not exist at any of our
Properties.
For properties to be disposed of, an impairment loss is recognized when
the fair value of the property, less the estimated cost to sell, is less than
the carrying amount of the property measured at the time the Company has a
commitment to sell the property and/or is actively marketing the property for
sale. A property to be disposed of is reported at the lower of its carrying
amount or its estimated fair value, less costs to sell. Subsequent to the date
that a property is held for disposition, depreciation expense is not recorded.
The Company accounts for its properties held for disposition in accordance with
Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"),
"Accounting for the Impairment or Disposal of Long-Lived Assets". Accordingly,
the results of operations for all assets sold or held for sale after January 1,
2003 have been classified as discontinued operations in all periods presented.
The gain on sale of discontinued operations is included in the gain on sale of
properties and other.
Certain costs, primarily legal costs, relative to our efforts to
effectively change the use and operations of several Properties subject to rent
control (see Note 9) are currently classified in other assets. These costs, to
the extent these efforts are successful, are capitalized to the extent of the
established value of the revised project and included in the net investment in
real estate for the appropriate Properties. To the extent these efforts are not
successful, these costs will be expensed. In addition, we capitalize certain
costs, primarily legal costs, related to entering into lease agreements which govern
the terms under which we may enter into leases with individual tenants and which
are expensed over the term of the lease agreement.
8
MANUFACTURED HOME COMMUNITIES, INC.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f) Notes Receivable
Notes receivable generally are stated at their outstanding unpaid
principal balances, net of any deferred fees or costs on originated loans, or
unamortized discounts or premiums net of a valuation allowance. Interest income
is accrued on the unpaid principal balance. Discounts or premiums are amortized
to income using the interest method. In certain cases we finance the sale of
homes to our residents (referred to as "Chattel Loans") which loans are secured
by the homes. The valuation allowance for the Chattel Loans is calculated based
on a comparison of the outstanding principal balance of each note compared to
the N.A.D.A. value and the current market value of the underlying manufactured
home collateral.
(g) Investments in and Advances to Joint Ventures
Investments in unconsolidated joint ventures are accounted for using the
equity method of accounting because we do not have control over the activities
of the investees. Our net equity investment is reflected on the consolidated
balance sheets, and the consolidated statements of operations include our share
of net income or loss from the unconsolidated joint ventures. Any difference
between the carrying amount of these investments on our consolidated balance
sheet and the historical cost of the underlying equity is depreciated as an
adjustment to income from unconsolidated joint ventures generally over 30 years.
NOTE 2 - EARNINGS PER COMMON SHARE
Earnings per common share are based on the weighted average number of
common shares outstanding during each year.period. Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128") defines the calculation
of basic and fully diluted earnings per share. Basic and fully diluted earnings
per share are based on the weighted average shares outstanding during each
period and basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. The conversion of OP Units has been
excluded from the basic earnings per share calculation. The conversion of an OP
Unit to a share of Common Stockcommon stock has no material effect on earnings per common
share.
The following table sets forth the computation of basic and fully diluted
earnings per share for the quarters and six months ended June 30, 2004 and 2003
(amounts in thousands):
QUARTERS ENDED SIX MONTHS ENDED
------------------------- --------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003
-------- ---------- --------- ----------
NUMERATORS:
INCOME FROM CONTINUING OPERATIONS:
Income from continuing operations - basic...... $ 678 $ 5,112 $ 5,640 $ 12,482
Amounts allocated to dilutive securities....... 181 1,373 1,337 3,149
-------- ---------- --------- ----------
Income from continuing operations -
fully diluted.............................. $ 859 $ 6,485 $ 6,977 $ 15,631
======== ========== ========= ==========
INCOME (LOSS) FROM DISCONTINUED OPERATIONS:
Income (loss) from
discontinued operations - basic............ $ (20) $ 9,288 $ (6) $ 9,590
Amounts allocated to dilutive securities....... --- 2,071 --- 2,142
-------- ---------- --------- ----------
Income (loss) from
discontinued operations - fully diluted.... $ (20) $ 11,359 $ (6) $ 11,732
======== ========== ========= ==========
(Table continued on next page)
9
MANUFACTURED HOME COMMUNITIES, INC.
NOTE 2 - EARNINGS PER COMMON SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted
earnings per share for the quarters ended March 31, 2004 and 2003 (amounts in
thousands):(Table continued from prior page)
MARCH 31, MARCH 31,
2004 2003
------------ ------------
NUMERATORS:
INCOME FROM CONTINUING OPERATIONS:
Income from continuing operations - basic......................... $ 4,976 $ 7,370
Amounts allocated to dilutive securities.......................... 1,156 1,776
------------ ------------
Income from continuing operations - fully diluted................. $ 6,132 $ 9,146
============ ============
INCOME FROM DISCONTINUED OPERATIONS:
Income from discontinued operations - basic....................... $ --- $ 302
Amounts allocated to dilutive securities.......................... --- 71
------------ ------------
Income from discontinued operations - fully diluted............... $ --- $ 373
============ ============
NET INCOME AVAILABLE FOR
EARNINGS PER COMMON SHARES -SHARE- FULLY DILUTED:
Net income available for Common
Shares - basic....................basic.......................... $ 4,976658 $ 7,67214,400 $ 5,634 $ 22,072
Amounts allocated to dilutive securities.......................... 1,156 1,847
------------ ------------securities.... 181 3,444 1,337 5,291
-------- ---------- --------- ----------
Net income available for Common
Shares - fully diluted............diluted.................. $ 6,132839 $ 9,519
============ ============17,844 $ 6,971 $ 27,363
======== ========== ========= ==========
DENOMINATOR:
Weighted average Common Shares
outstanding - basic.................... 22,674 21,918basic..................... 22,737 22,027 22,706 21,973
Effect of dilutive securities:
Redemption of Common OP Units for
Common Shares................... 5,312 5,358Shares........................... 5,917 5,344 5,615 5,351
Employee stock options and restricted shares...................... 535 464
------------ ------------shares... 488 594 519 529
-------- ---------- --------- ----------
Weighted average Common Shares
outstanding - fully diluted............ 28,521 27,740
============ ============diluted............. 29,142 27,965 28,840 27,853
======== ========== ========= ==========
NOTE 3 - COMMON STOCK AND RELATED TRANSACTIONS
On January 16, 2004, we paid a one-time special distribution of $8.00 per
share payable to stockholders of record on January 8, 2004. We used proceeds
from the $501 million borrowing in October 2003 to pay the special distribution.
The special cash dividenddistribution will be reflected on stockholders' 2004 1099-DIV
to be issued in January 2005.
In connection with the $501 million borrowing and subsequent special
distribution, on February 27, 2004, the Company contributed all of its assets to
MHC Trust, a newly formed Maryland real estate investment trust, including itsthe
Company's entire partnership interest in MHC Operating Limited Partnership. In
exchange for its contribution, the Company was issued all of the outstanding
common and
preferred stockshares of MHC Trust. As a result of the restructuring, MHC will continue to
qualify as a real estate investment trust under the Code, with its assets
consisting of interests in MHC Trust. MHC Trust, in turn, will also qualify as a
real estate investment trust under the Code and will be the General
Partnergeneral partner of
the Operating Partnership. On May 1, 2004, in connection with the restructuring,
MHC sold cumulative preferred stock ("Series A & B preferred stock") to certain
unaffiliated investors.
On May 13, 2004, the Company issued 1.1 million OP units valued at $32.2
million in connection with the acquisition of the Monte Vista property.
On April 9, 2004, the Company paid a $.0125$0.0125 per share distribution for
the quarter ended March 31, 2004 to stockholders of record on March 26, 2004. On
July 9, 2004 the Company paid a $0.0125 per share distribution for the quarter
ended June 30, 2004 to stockholders of record on June 25, 2004. The Operating
Partnership paid distributions of 9.0% per annum on the $125 million of Series D
Cumulative Redeemable Perpetual Preferred Units ("Preferred Units").
Distributions on the Preferred Units were paid on March 31, 2004 and June 30,
2004. On June 30, 2004 approximately $8,000 of the $11,915 cumulative
distribution has been paid on the Series A & B preferred stock.
10
MANUFACTURED HOME COMMUNITIES, INC.
NOTE 4 - INVESTMENT IN REAL ESTATE
During the quartersix months ended March 31,June 30, 2004, we acquired 4351 Properties as
listed in the table below. The combined investment in real estate for these 4351
properties was approximately $345$530 million and was funded with monies held in
short-term investments and additional debt.debt (amounts in millions, except for
total sites).
PURCHASEREAL NET
CLOSING DATE PROPERTY LOCATION TOTAL SITES PRICEESTATE DEBT EQUITY
- ----------------- ---------------- ----------------------------------- ------------------ ----------- ----------- --------- ------------------ ------ ------
ACQUISITIONS:
January 15, 2004 O'Connell's (a) Amboy, IL 668 $ 6.6 $ 5.0 $ 1.6
January 30, 2004 Spring Gulch (a) New Holland, PA 420 6.4 4.8 1.21.6
February 3, 2004 Paradise (a) Mesa, AZ 950 25.7 20.0 5.05.7
February 18, 2004 Twin Lakes (a) Chocowinity, NC 400 5.2 3.8 1.4
February 19, 2004 Lakeside (a) New Carlisle, IN 95 1.7 ----- 1.7
February 5, 2004 Shangri La Largo, FL 160 (b) 4.5 (b)
February 5, 2004 Terra Ceia Palmetto, FL 203 (b) 2.6 (b)
February 5, 2004 Southernaire Mt. Dora, FL 134 (b) 2.1 (b)
February 5, 2004 Sixth Avenue Zephryhills, FL 140 (b) 2.3 (b)
February 5, 2004 Suni Sands Yuma, AZ 336 (b) 3.2 (b)
February 5, 2004 Topic's Spring Hill, FL 230 (b) 2.2 (b)
February 5, 2004 Coachwood Colony Leesburg, FL 200 (b) 4.3 (b)
February 5, 2004 Waterway Cedar Point, NC 336 (b) 6.3 (b)
February 5, 2004 Desert Paradise Yuma, AZ 260 (b) 1.5 (b)
February 5, 2004 Goose Creek Newport, NC 598 (b) 12.6 (b)
February 17, 2004 NHC Portfolio (c)(a) Various 11,357 235.0 159.0 69.0
May 3, 2004 Viewpoint Mesa, AZ 1,928 81.3 44.0 37.3
May 12, 2004 Cactus Gardens Yuma, AZ 430 7.9 4.9 3.0
May 13, 2004 Monte Vista Mesa, AZ 832 45.8 23.0 22.8
May 14, 2004 Carefree Cove Ft. Lauderdale, FL 164 (c) 4.8 (c)
May 14, 2004 Sunshine Holiday Ft. Lauderdale, FL 399 (c) 8.6 (c)
May 14, 2004 Las Palmas Rialto, CA 135 (c) 3.8 (c)
May 14, 2004 Parque la Quinta Rialto, CA 166 (c) 5.1 (c)
May 14, 2004 Village of the Four San Jose, CA 271 (c) 15.4 (c)
Seasons
(a) We assumed inventoryOn February 17, 2004, the Company acquired 93% of approximately $419,000, rents receivedPAMI entities'
interests in advance28 properties and as such included the acquisition in
its consolidated financial statements at that time. PAMI filed a
lawsuit disputing the authority of approximately $2.4 million and other liabilities of
approximately $432,000 in connectionNHC to enter into the transaction
with the acquisitionCompany and a trial was held in mid-April 2004. On June 21,
2004, the Court of O'Connell's, Spring Gulch, Paradise, Twin Lakes and Lakeside (the
"Other 2004 Acquisitions").Chancery for the State of Delaware in Civil
Action No. 259-N issued a Memorandum Opinion affirming NHC had the
authority to enter into the transaction with the Company.
(b) The portfolio was acquired for a total purchase price of $64 million
and $20.9 million of net equity. The transaction was funded
partially through loans obtained on the individual properties as
shown in the table.
In addition, we assumed approximately $1.1(c) The portfolio was acquired for a total purchase price of $52.9
million and $15.2 million of net equity. The transaction was funded
partially through loans obtained on the individual properties as
shown in the table.
In connection with the 2004 acquisitions and not reflected in the table
above the Company assumed inventory of approximately $1.2 million, other assets
of $4.9 million, rents received in advance of approximately $13.6 million and
other liabilities of approximately $421,000$5.8 million. The Company also issued
operating partnership units for value of other
liabilities.
(c) The NHC Portfolio consists of 28 vacation resort properties,
containing 11,357 sites. Twenty of the properties are locatedapproximately $32 million in Florida, six in Texas, and two in California. The acquisition was
funded with monies held in short-term investments and $50 million drawn
from the Company's line of credit. Beginning in 1996, a series of
partnerships were formed between "NHC" entities and "PAMI" (the former
General Partner of NHC) entities. A trial on all claims between NHC and
PAMI, including whether NHC had the authority to consummate the
transactionconnection
with the Company was held on April 15 and 16, 2004. The
Company continues to believe in the meritpurchase of NHC's claims and defenses.
Under the terms and conditions of the partnership agreements, on
February 17, 2004, $69 million was paid to acquire the PAMI entities'
interests. Principals of the NHC entities will continue to operate the
properties under a management agreement with the Company and maintain
an approximate 7% equity position in the new entity. The existing
dispute is related to the PAMI entities' desire to liquidate their
investments. The Company, after advice from its legal counsel, believes
that there is substantial merit to its' position that the NHC Portfolio
transaction is valid. Accordingly, the Company has treated the NHC
Portfolio transaction as an acquisition in the financial statements.Monte Vista.
11
MANUFACTURED HOME COMMUNITIES, INC.
NOTE 4 - INVESTMENT IN REAL ESTATE (CONTINUED)
On May 28, 2004, a property located in Lake Placid, Florida was sold for a
selling price of $3.4 million, with net proceeds of $0.8 million received July
2004. No gain or loss on disposition was recognized in the period. The following table presents the preliminary estimated fair values of the assets
acquired and liabilities assumedoperating
results have been reflected in connection with the acquisition of NHC on
February 17, 2004 and the summarized revenues and expenses of NHC for the period
February 17, 2004 through March 31, 2004 (amounts in thousands).
ASSETS
Land.................................................................... $ 58,798
Land improvements, Buildings and other depreciable property............. 176,545
Cash and cash equivalents............................................... 3,842
Notes receivable........................................................ 31
Rents receivable........................................................ 547
Inventory............................................................... 718
Prepaid expenses and other assets....................................... 4,343
-------------
Total assets assumed............................................... 244,824
LIABILITIES
Mortgage notes payable.................................................. 159,003
Accounts payable and accrued expenses................................... 4,388
Accrued interest payable................................................ 614
Rents received in advance............................................... 6,051
-------------
Total liabilities assumed.......................................... 170,056
Minority Interest ...................................................... 5,600
-------------
Cash paid............................................................... $ 69,168
=============
REVENUES AND EXPENSES
Resort base rental income............................................... $ 5,679
Utility and other income................................................ 543
-------------
Property operating revenues........................................... 6,222
Property operating and maintenance...................................... 2,538
Real estate taxes....................................................... 334
Property management..................................................... 394
-------------
Property operating expenses........................................... 3,266
-------------
Income from property operations.................................... 2,956
Income from home sales and other........................................ 534
Interest and related amortization expense............................... (1,461)
Depreciation on corporate assets........................................ (52)
Depreciation on real estate............................................. (561)
-------------
Income before allocation to minority interests..................... $ 1,416
=============
discontinued operations.
All acquisitions have been accounted for utilizing the purchase method of
accounting, and, accordingly, the results of operations of acquired assets are
included in the statements of operations from the dates of acquisition. Certain
purchase price adjustments may be recorded within one year following the
acquisitions. We acquired all of these Properties from unaffiliated third
parties.
12
MANUFACTURED HOME COMMUNITIES, INC.
NOTE 4 - INVESTMENT IN REAL ESTATE (CONTINUED)
The following table illustrates the effect on net income and earnings per
share if the Company had consummated the acquisitions during the quartersix months
ended March 31,June 30, 2004 on January 1, 2004 and 2003, respectively (in thousands,
except per share amounts):respectively:
For the Quarters Ended March 31,Pro Forma Information: FOR THE SIX MONTHS ENDED JUNE 30,
2004 2003
------------- ---------------------------
Pro Forma Information:
Property operating revenues............................ $ 78,032157,182 $ 74,043151,219
============= ===========================
Income from continuing operations...................... $ 6,7987,145 $ 9,25512,859
============= ===========================
Net income available for common shares.................Common Shares................. $ 6,7987,139 $ 9,55722,179
============= ===========================
Earnings per Common Share - Basic:
Income from continuing operations.................... $ .300.31 $ .420.59
Net income available for Common Shares............... $ .300.31 $ .441.01
Earnings per Common Share - Fully Diluted:
Income from continuing operations.................... $ .290.31 $ .410.58
Net income available for Common Shares............... $ .290.31 $ .431.00
The Company is actively seeking to acquire additional manufactured home
communities and resort communities and
currently is engaged in negotiations relating to the possible acquisition of a
number of Properties. At any time these negotiations are at varying stages which
may include contracts outstanding to acquire certain manufactured home communities and resort communitiesproperties which are
subject to satisfactory completion of the Company's due diligence review.
NOTE 5 - NOTES RECEIVABLE
As of March 31,June 30, 2004 and December 31, 2003, the Company had approximately
$12.2$12.5 million and $11.6 million in notes receivable, respectively. The Company
has approximately $11.6 million in Chattel Loans receivable, which yield
interest at a per annum average rate of approximately 9.9%, have an average term
and amortization of 5 to 15 years, require monthly principal and interest
payments and are collateralized by manufactured homes at certain of the
Properties. TheAs of June 30, 2004, the Company hashad approximately $450,000$433,000 in notes
which bear interest at a per annum rate of prime plus 0.5% and mature on
December 31, 2011. The notes are collateralized with a combination of Common OP
Units and partnership interests in certain joint ventures.
NOTE 6 - INVESTMENT IN AND ADVANCES TO JOINT VENTURES
On February 3, 2004, the Company invested approximately $29.7 million in
preferred equity interests (the "Mezzanine Investment") in six entities
controlled by Diversified Investments, Inc. ("Diversified"). These entities own
in the aggregate 11 properties, containing 5,054 sites. Approximately $11.7
million of the Mezzanine Investment accrues at a per annum average rate of 10%,
with a minimum pay rate of 6.5%, payable quarterly, and approximately $17.9
million of the Mezzanine Investment accrues at a per annum average rate of 11%,
with a minimum pay rate of 7%, payable quarterly. To the extent the minimum pay
12
MANUFACTURED HOME COMMUNITIES, INC.
NOTE 6 - INVESTMENT IN JOINT VENTURES (CONTINUED)
rates on the respective Mezzanine Investments are not achieved, the accrual
rates increase to 12% and 13%, per annum, respectively. The Company can acquire
these properties in the future at capitalization rates of between 8% and 8.5%,
beginning in 2006. In addition, the Company has invested approximately $1.4
million in the Diversified entities managing these 11 properties, which is
included in prepaid expenses and other assets on the Company's Consolidated
Balance Sheet as of March 31,June 30, 2004.
13
MANUFACTURED HOME COMMUNITIES, INC.
NOTE 6 - INVESTMENT IN JOINT VENTURES (CONTINUED)
During the quartersix months ended March 31,June 30, 2004, the Company invested
approximately $1.4$2.1 million with Diversified in foursix separate property owningproperty-owning
entities. The Company can acquire these properties in the future at
capitalization rates of between 8% and 8.5%, beginning in 2006.
In addition, the Company recorded approximately $584,000$1.9 million and $353,000$1.1
million of net income from joint ventures in the quarterssix months ended March 31,June 30, 2004
and 2003, respectively, and received approximately $341,000$2.4 million and $167,000$0.7 million
in distributions from such joint ventures for the six months ended June 30, 2004
and 2003, respectively. Included in such distributions for the quarterssix months ended
March 31,June 2004 is a $1.5 million return of capital, of which $531,000 exceeded the
Company's basis and 2003, respectively.thus was recorded in income from unconsolidated joint
ventures and other.
Due to the Company's inability to control the joint ventures, the Company
accounts for its investment in the joint ventures using the equity method of
accounting.
The following table summarizes the Company's investments in unconsolidated joint
ventures:
NUMBER OF ECONOMIC INVESTMENT AS OF
NUMBER ECONOMIC JUNE 30, DEC 31,
PROPERTY LOCATION OF SITES INTEREST (a) MAR 31,INTEREST(a) 2004 DEC 31, 2003
- ----------------------------------------- ----------------- --------- ------------ ------------ --------------------------- ----------------------------
(in thousands)
Lake Myers Mocksville, NC 425 25% $ 378369 $ -----
Pine Haven Ocean View, NJ 625 25% 391 ---384 --
Twin Mills Howe, IN 501 25% 245 ---286 --
Plymouth Rock Elkhart Lake, WI 609 25% 412 ---359 --
Trails West Tucson, AZ 503 50% 1,7571,726 1,752
Plantation Calimesa, CA 385 50% 2,8102,874 2,825
Manatee Bradenton, FL 290 90% 3545 45
Home Hallandale, FL 136 90% 1,04325 1,082
Villa del Sol Sarasota, FL 207 90% 655680 654
Voyager RV Resort Tucson, AZ ----- 25% 4,5664,577 4,412
Preferred Interests in
College Heights ----- 17% 8,1288,123 8,058
Mezzanine Investments 5,054 30,168 ---30,632 --
Mesa Verde Yuma, AZ 345 25% 306 --
Winter Garden Winter Garden, FL 350 25% 362 --
----- ------------ -------- 8,735---------
9,430 $ 50,58850,748 $ 18,828
===== ============ ======== =========
(a) The percentages shown approximate the Company's economic interest. The
Company's legal interest may differ.
13
MANUFACTURED HOME COMMUNITIES, INC.
NOTE 7 - LONG-TERM BORROWINGS
As of March 31,June 30, 2004 and December 31, 2003, the Company had outstanding
mortgage indebtedness of approximately $1,307$1,417 million and $1,076 million,
respectively, encumbering 156164 and 114 of the Company's Properties, respectively.
As of March 31,June 30, 2004 and December 31, 2003, the carrying value of such Properties
was approximately $1,487$1,671 million and $1,124 million, respectively.
The outstanding mortgage indebtedness as of March 31,June 30, 2004 consists of:
- - Approximately $501.4$500.4 million of mortgage debt ("Mortgage Debt") consisting
of 49 loans collateralized by 51 Properties beneficially owned by separate
legal entities that are subsidiariesSubsidiaries of the Company, which we closed on
October 17, 2003 (the "Recap"). Of this Mortgage Debt, $177.9 million
bears interest at 5.35% per annum and matures November 1, 2008; $71.1
million bears interest at 5.72% per annum and matures November 1, 2010;
$79.1 million bears interest at 6.02% per annum and matures November 1,
2013; and $173.3 million bears interest at 6.33% per annum and matures
November 1, 2015. The Mortgage Debt amortizes over 30 years.
14
MANUFACTURED HOME COMMUNITIES, INC.
NOTE 7 - LONG-TERM BORROWINGS (CONTINUED)
- - A $265.0 million mortgage note (the "$265 Million Mortgage")
collateralized by 28 Properties beneficially owned by MHC Financing
Limited Partnership. The $265 Million Mortgage has a maturity date of
January 2, 2028 and bears interest at 7.015% per annum. There is no
principal amortization until February 1, 2008, after which principal and
interest are to be paid from available cash flow and the interest rate
will be reset at a rate equal to the then 10-year U.S. Treasury
obligations plus 2.0%. The $265 Million Mortgage is presented net of a
settled hedge of $3.0 million (net of accumulated amortization of
$384,000$411,907) which is being amortized into interest expense over the life of
the loan.
- - A $91.2$90.9 million mortgage note (the "DeAnza Mortgage") collateralized by 6
Properties beneficially owned by MHC-DeAnza Financing Limited Partnership.
The DeAnza Mortgage bears interest at a rate of 7.82% per annum, amortizes
beginning August 1, 2000 over 30 years and matures July 1, 2010.
- - A $48.8$48.6 million mortgage note (the "Stagecoach Mortgage") collateralized
by 7 Properties beneficially owed by MHC Stagecoach L.L.C. The Stagecoach
Mortgage bears interest at a rate of 6.98% per annum, amortizes beginning
September 1, 2001 over 10 years and matures September 1, 2011.
- - A $44.3$44.1 million mortgage note (the "Bay Indies Mortgage") collateralized
by one Property beneficially owned by MHC Bay Indies, L.L.C. The Bay
Indies Mortgage bears interest at a rate of 5.69% per annum, amortizes
beginning April 17, 2003 over 25 years and matures April 17,May 1, 2013.
- - A $15.3 million mortgage note (the "Date Palm Mortgage") collateralized by
one Property beneficially owned by MHC Date Palm, L.L.C. The Date Palm
Mortgage bears interest at a rate of 7.96% per annum, amortizes beginning
August 1, 2000 over 30 years and matures July 1, 2010.
- - Approximately $158 million of mortgage debt (the "NHC Mortgages"),
consisting of 28 loans collateralized by 28 Properties. The NHC
Mortgage was recorded at fair market value with the related premium
being amortized over the life of the loan using the effective interest
rate. The NHC Mortgage bears interest at an average rate of 5.14% per
annum, amortizes over 30 years and matures at various dates through
November 1, 2027.
- - Approximately $41.6 million of mortgage debt (the "Diversified
Mortgages"), consisting of 10 loans collateralized by 10 Properties,
beneficially owned by separate legal entities that are Subsidiaries of
the Company. The Diversified Mortgage bears interest at a rate of 5.81%
per annum, amortizes over 30 years and matures March 1, 2014.
- - Approximately $143.9$455.5 million of mortgage debt on 2470 other Properties,
which was recorded at fair market value with the related discount or
premium being amortized over the life of the loan using the effective
interest rate.rate method. Scheduled maturities for the outstanding
indebtedness are at various dates through November 30, 2020,1, 2027, and fixed
interest rates range from 5.25%5.14% to 9.3%8.36% per annum. Included in this debt,
the Company has a $2.4 million loan recorded to account for a direct
financing lease entered into in May 1997. Approximately $33$157 million of
this debt was assumed in the acquisition of four28 Properties during the quartersix
months ended March 31,June 30, 2004 (see Note 4).
14
MANUFACTURED HOME COMMUNITIES, INC.
NOTE 7 - LONG-TERM BORROWINGS (CONTINUED)
We have an unsecured Linelines of Creditcredit consisting of the following:
- - A $110 million facility with a group of banks, (the "Line of
Credit") with a total facility of $110 million, bearing interest at the
London Interbank Offered Rate ("LIBOR") plus 1.65% per annum that matures
on August 9, 2006. We2006, for which we pay a quarterly fee on the average unused
amount of the total facility equal to 0.15% of such amount. As of March 31,June 30,
2004, $75$47 million was available under this facility.
- - A $50 million facility with Wells Fargo Bank, bearing interest at LIBOR
plus 1.65% per annum that matures on August 4, 2006 for which we pay a
quarterly fee on the Lineaverage unused amount of Credit.
15
MANUFACTURED HOME COMMUNITIES, INC.the total facility equal to
0.15% of such amount. This facility remained undrawn at June 30, 2004.
NOTE 8 - STOCK-BASED COMPENSATION
We account for our stock-based compensation in accordance with SFAS No.
123 and its amendment (SFAS No. 148), "Accounting for Stock Based Compensation",
which results in compensation expense being recorded based on the fair value of
the stock option compensation issued. SFAS No. 148 provided three possible transition
methods for changing to the fair value method. Effective January 1, 2003, we
elected to use the modified-prospective method, which requiredrequires that we recognize
stock-based employee compensation cost from the beginning of the fiscal year in
which the recognition provisions are first applied as if the fair value method
had been used to account for all employee awards granted or settled in fiscal
years beginning after December 15, 1994. Stock-based compensation expense was
approximately $683,000$1.3 million and $536,000$1.0 million for the quarterssix months ended March 31,June 30,
2004 and 2003, respectively.
Pursuant to the Stock Option Plan as discussed in Note 14 to the 2003 Form
10-K, certain officers, directors, employees and consultants have been offered
the opportunity to acquire shares of common stock of the Company through stock
options ("Options"). During the quartersix months ended March 31,June 30, 2004, Options for
107,623120,457 shares of common stock were exercised.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
DEANZA SANTA CRUZ
The residents of DeAnza Santa Cruz Mobile Estates, a Property located in
Santa Cruz, California, brought several actions opposing fees and charges in
connection with water service at the Property. As a result of one action, the
Company rebated approximately $36,000 to the residents. The DeAnza Santa Cruz
Homeowners Association ("HOA") then proceeded to a jury trial alleging these
"overcharges" entitled them to an award of punitive damages. In January 1999, a
jury awarded the HOA $6.0 million in punitive damages. On December 21, 2001 the
California Court of Appeal for the Sixth District reversed the $6.0 million
punitive damage award, the related award of attorneys' fees, and, as a result,
all post-judgment interest thereon, on the basis that punitive damages are not
available as a remedy for a statutory violation of the California Mobilehome
Residency Law ("MRL"). The decision of the appellate court left the HOA, the
plaintiff in this matter, with the right to seek a new trial in which it must
prove its entitlement to either the statutory penalty and attorneys' fees
available under the MRL or punitive damages based on causes of action for fraud,
misrepresentation or other tort. In order to resolve this matter, the Company
accrued for and agreed to pay $201,000 to the HOA. This payment resolved the
punitive damage claim. The HOA's attorney has made a motion asking for an award
of attorneys' fees and costs in the amount of approximately $1.5 million as a
result of this resolution of the litigation. On April 2, 2003 the court awarded
attorney's fees to the HOA's attorney in the amount of $593,000 and court costs
of approximately $20,000. The Company has appealed this award. On July 13, 2004, the
California Court of Appeal affirmed the award andof the attorney's fees in favor of
the HOA's attorney. As of June 30, 2004 the Company has not accrued for these
amounts and will pay the amount in its consolidated financial statements.
16award without any material impact on earnings.
15
MANUFACTURED HOME COMMUNITIES, INC.
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
OTHER CALIFORNIA RENT CONTROL LITIGATION
As part of the Company's effort to realize the value of its Properties
subject to rent control, the Company has initiated lawsuits against several
municipalities in California. The Company's goal is to achieve a level of
regulatory fairness in California's rent control jurisdictions, and in
particular those jurisdictions that prohibit increasing rents to market upon
turnover. This regulatory feature, called vacancy control, allows tenants to
sell their homes for a premium representing the value of the future discounted
rent-controlled rents. In the Company's view, such regulation results in a
transfer of the value of the Company's shareholders' land, which would otherwise
be reflected in market rents, to tenants upon the sales of their homes in the
form of an inflated purchase price that cannot be attributed to the value of the
home being sold. As a result, in the Company's view, the Company loses the value
of its asset and the selling tenant leaves the Community with a windfall
premium. The Company has discovered through the litigation process that certain
municipalities considered condemning the Company's Communities at values well
below the value of the underlying land. In the Company's view, a failure to
articulate market rents for sites governed by restrictive rent control would put
the Company at risk for condemnation or eminent domain proceedings based on
artificially reduced rents. Such a physical taking, should it occur, could
represent substantial lost value to shareholders. The Company is cognizant of
the need for affordable housing in the jurisdictions, but asserts that
restrictive rent regulation with vacancy control does not promote this purpose
because the benefits of such regulation are fully capitalized into the prices of
the homes sold. The Company estimates that the annual rent subsidy to tenants in
these jurisdictions is approximately $15 million. In a more well-balancedwell balanced
regulatory environment, the Company would receive market rents that would
eliminate the subsidy and homes would trade at or near their intrinsic value.
In connection with such efforts, the Company recently announced it has
entered into a settlement agreement with the City of Santa Cruz, California and
that, pursuant to the settlement agreement, the City amended its rent control
ordinance to exempt the Company's property from rent control as long as the
Company offers a long term lease which gives the Company the ability to increase
rents to market upon turnover and bases annual rent increases on the Consumer
Price Index ("CPI"). The settlement agreement benefits the Company's
shareholdersstockholders by allowing them to receive the value of their investment in this
Community through vacancy decontrol while preserving annual CPI based rent
increases in this age restricted Property.
The Company's efforts to achieve a balanced regulatory environment
incentivize tenant groups to file lawsuits against the Company seeking large
damage awards. The homeowners association at Contempo Marin ("CMHOA"), a 396
site Property in San Rafael, California, sued the Company in December 2000 over
a prior settlement agreement on a capital pass-through after the Company sued
the City of San Rafael in October 2000 alleging its rent control ordinance is
unconstitutional. In the Contempo Marin case, the CMHOA prevailed on a motion
for summary judgment on an issue that permits the Company to collect only $3.72
out of a monthly pass-through amount of $7.50 that the Company believes had been
agreed to by the CMHOA in a settlement agreement. The Company intends to
vigorously defend this matter, which has been stayed pending a related state
court appeal by the Company of an order dismissing its claims against the City
of San Rafael. On May 23, 2004, the California Court of Appeal affirmed the
trial court's order dismissing the Company's claims against the City of San
Rafael. Accordingly, the CMHOA is expected to request a trial on its remaining
claims for damages. The Company believes that such lawsuits will be a
consequence of the Company's efforts to change rent control since tenant groups
actively desire to preserve the premium value of their homes in addition to the
discounted rents provided by rent control. The Company has determined that its
efforts to rebalance the regulatory environment despite the risk of litigation
from tenant groups are necessary not only because of the $15 million annual
subsidy to tenants, but also because of the condemnation risk.
1716
MANUFACTURED HOME COMMUNITIES, INC.
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
ELLENBURG COMMUNITIES
The Company and certain other parties entered into a settlement agreement
(the "Settlement"), which was approved by the Los Angeles County Superior Court
in April 2000. The Settlement resolved substantially all of the litigation and
appeals involving the Ellenburg Properties, and transactions arising out of the
Settlement closed on May 22, 2000. Only the appeal of one entity remained, the
outcome of which was not expected to materially affect the Company.
In connection with the Ellenburg Acquisition, on September 8, 1999,
Ellenburg Fund 20 ("Fund 20") filed a cross complaint in the Ellenburg
dissolution proceeding against the Company and certain of its affiliates
alleging causes of action for fraud and other claims in connection with the
Ellenburg Acquisition. The Company subsequently successfully had the cross
complaint against the Company and its affiliates dismissed with prejudice by the
California Superior Court. However, Fund 20 appealed. Although this appeal was
one not resolved by the Settlement, the California Court of Appeal dismissed
Fund 20's substantive appeals on March 13, 2003 as moot. Fund 20 petitioned the
California Supreme Court to review this decision which review was denied.
In October 2001, Fund 20 sued the Company and certain of its affiliates
again, this time in Alameda County, California making substantially the same
allegations. The Company obtained an injunction preventing the case from
proceeding until the Fund 20 appeal is decided and other related proceedings in
Arizona (from which the Company has already been dismissed with prejudice) arewere
concluded. The Company obtained a court order enjoining Fund 20 from proceeding
with its Alameda County action.
In February 2004, the Company entered into a settlement agreement with
Fund 20 resolving all remaining matters at no cost to the Company and with
mutual releases.
COUNTRYSIDE AT VERO BEACH
The Company has received letters dated June 17, 2002 and August 26, 2002
from Indian River County ("County"), claiming that the Company currently owes
sewer impact fees in the amount of approximately $518,000 with respect to the
Property known as Countryside at Vero Beach, located in Vero Beach, Florida,
purportedly under the terms of an agreement between the County and a prior owner
of the Property. In response, the Company has advised the County that these fees
are no longer due and owing as a result of a 1996 settlement agreement between
the County and the prior owner of the Property, providing for the payment of
$150,000 to the County to discharge any further obligation for the payment of
impact or connection fees for sewer service at the Property. The Company paid
this settlement amount (with interest) to the County in connection with the
Company's acquisition of the Property. Accordingly, the Company believes that
the County's claims are without merit.
DELAWARE DECLARATORY JUDGMENT ACTION
In April 2002, the Company entered into a Stipulation and Consent Order to
Cease and Desist (the "Consent Order") with the State of Delaware (the "State").
The Consent Order resolved various issues raised by the State concerning the
terms of a new lease form used or proposed for use by the Company at certain of
its Properties in Delaware. Among other provisions, the Consent Order
contemplated that the Company would work with the State to develop and implement
a new lease form for use in Delaware. The Consent Order expressly provided that
nothing contained therein would preclude the Company from seeking declaratory
relief from a court as to the legality or enforceability of any provisions which
the Company might wish to incorporate in future leases.
1817
MANUFACTURED HOME COMMUNITIES, INC.
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
DELAWARE DECLARATORY JUDGMENT ACTION (CONTINUED)
Throughout the summer of 2002, the Company's Delaware legal counsel
engaged in dialogue with representatives of the State concerning various
matters, including the lease provisions to which the State had objected but
which the Company wished to incorporate in future leases. Through this process,
it became apparent that the parties could not reach agreement as to the legality
or enforceability of the proposed lease provisions, and that the Company would
need to seek declaratory relief from a court in order to resolve the matter, as
contemplated by the Consent Order. Accordingly, on August 29, 2002, the Company
filed a Petition for Declaratory Judgment and Other Relief (as amended, the
"Petition") in Sussex County, Delaware Superior Court (the "Court").
In response to the filing of the Petition, on October 1, 2002, the State
filed its Answer to Petition for Declaratory and Other Relief, and Counterclaims
for Civil Enforcement and Contempt (as amended, "Answer and Counterclaim") with
the Court. In the Answer and Counterclaim, the State sought, inter alia,
restitution, statutory penalties, investigative costs and attorneys' fees under
the Delaware Mobile Home Lots and Leases Act, the Consumer Fraud Act, the
Uniform Deceptive Trade Practices Act and the Delaware Consumer Contracts law,
and separately sought a finding of contempt and related contempt penalties for
alleged violations of the Consent Order.
The Company filed a Motion to Dismiss Respondents' Counterclaims with the
Court on October 29, 2002, and the State filed a Motion for Summary Judgment
with the Court on November 15, 2002. On December 30, 2002, the Company filed a
First Amended Petition for Declaratory Judgment and Other Relief with the Court,
and on January 31, 2003, the State filed an Amended Answer and Counterclaim with
the Court.
On August 29, 2003, the Court issued its decision disposing of all pending
claims in the litigation except one. Specifically, the Court held, inter alia,
that (i) the Company may eliminate the rent cap formula from existing leases at
certain of its Delaware Properties as the leases come up for renewal, (ii)
certain lease provisions proposed by the Company may not be implemented or
enforced under applicable state law, (iii) the change in water supplier at one
of the Properties did not violate the leases at such Property, (iv) the Company
did not violate the Consent Order by filing the Petition, and (v) the Company
did not violate any state statutes as alleged by the State.
The August 29, 2003 decision left open the issue of whether the Company had
violated the Consent Order by continuing to use the disputed lease form (but not
enforce the provisions at issue) at one of its Properties following entry of the
Consent Order (the Company believed that it had no choice but to continue to use
this lease form until the State had approved a new form for use at the Property
as contemplated by the Consent Order). On October 3, 2003, the Court issued its
final order, finding that continued use of the disputed lease form, as to new
tenants but not as to renewal tenants, following entry of the Consent Order
constituted a violation thereof, and assessing a civil penalty in the amount of
$5,000.
On November 3, 2003, the State filed a Notice of Appeal with the Supreme
Court of the State of Delaware (the "Supreme Court"), appealing a portion of the
Court's order denying the State's Motion for Summary Judgment. The State's
appeal was limited to the single issue of whether the Company has the right to
eliminate "rent cap" provisions contained in certain existing leases upon
automatic renewal of the leases in accordance with Delaware law. Following oral
argument in the matter before a three-justice panel of the Supreme Court, on
March 17, 2004, the Supreme Court issued an order affirming the Company's right
to eliminate these "rent cap" provisions. The State subsequently filed a motion
for rehearing en banc,enbanc, and on April 21, 2004, the Supreme Court granted the
State's motion. The Supreme Court has designated the appeal for decision upon the
briefs, and has indicated thatbriefs. On June 8, 2004, the appeal may be
considered to be under submission for decision as of May 11, 2004.
19Supreme Court issued its order, again affirming the
Court's order.
18
MANUFACTURED HOME COMMUNITIES, INC.
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
OTHER
The Company is involved in various other legal proceedings arising in the
ordinary course of business. Management believes that all proceedings herein
described or referred to, taken together, are not expected to have a material
adverse impact on the Company.
20
MANUFACTURED HOME COMMUNITIES, INC.NOTE 10 - SUBSEQUENT EVENTS
On August 3, 2004, the Company announced that it has entered into an
agreement to purchase from the parent of Thousand Trails, Inc. ("Thousand
Trails") 57 properties and approximately 3,000 acres of vacant land. Under the
agreement the Company will lease the real estate (excluding the vacant land) to
Thousand Trails on a triple net basis and subject to annual escalations at a
rate of $16 million per annum. The term of the lease is 15 years, with two five
year renewals at the option of the lessee. In addition, Thousand Trails will
continue to operate the properties. The transaction is subject to certain
conditions and financing arrangements and is expected to close in the fourth
quarter of 2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following is a discussion of the interim results of operations,
financial condition and liquidity and capital resources of the Company for the
threequarter and six months ended March 31,June 30, 2004 compared to the corresponding period
in 2003. It should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included herein and the 2003 Form 10-K. The
following discussion may contain certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, which reflect
management's current views with respect to future events and financial
performance. Such forward-looking statements are subject to certain risks and
uncertainties, including, but not limited to, the effects of future events on
the Company's financial performance, the adverse impact of external factors such
as inflation and consumer confidence, and the risks associated with real estate
ownership.
RESULTS OF OPERATIONS
PROPERTY ACQUISITIONS, JOINT VENTURES AND DISPOSITIONS
The following chart lists the Properties acquired, invested in, or sold
since January 1, 2003. The Company defines its core manufactured home community
portfolio ("Core Portfolio") as manufactured home Properties owned throughout
both periods of comparison. Excluded from the Core Portfolio are any Properties
acquired or sold during the period and also any recreational vehicle resorts
("Resorts") which, together, are referred to as the "Non-Core" Properties.
PROPERTY TRANSACTION DATE SITES
- ------------------------------------------------------------------- ---------------- -----
TOTAL SITES AS OF JANUARY 1, 2003.......................... 51,582
ACQUISITIONS:
Toby's................................................ December 3, 2003 379
Araby Acres........................................... December 15, 2003 337
Foothill ............................................. December 15, 2003 180
O'Connell's .......................................... January 15, 2004 668
Spring Gulch.......................................... January 30, 2004 420
Paradise.............................................. February 3, 2004 950
Twin Lakes............................................ February 18, 2004 400
Lakeside.............................................. February 19, 20012004 95
Shangri La............................................ February 5, 2004 160
Terra Ceia............................................ February 5, 2004 203
Southernaire.......................................... February 5, 2004 134
Sixth Avenue.......................................... February 5, 2004 140
Suni Sands............................................ February 5, 2004 336
Topic's............................................... February 5, 2004 230
Coachwood Colony...................................... February 5, 2004 200
Waterway.............................................. February 5, 2004 336
Desert Paradise....................................... February 5, 2004 260
Goose Creek........................................... February 5, 2004 598
NHC................................................... February 17, 2004 11,357
(table continued on next page)
2119
MANUFACTURED HOME COMMUNITIES, INC.
RESULTS OF OPERATIONS (CONTINUED)
(table continued from priorprevious page)
PROPERTY TRANSACTION DATE SITES
- ----------------------------------------------------------- ---------------- -----
Shangri La............................................ February 5, 2004 160
Terra Ceia............................................ February 5, 2004 203
Southernaire.......................................... February 5, 2004 134
Sixth Avenue.......................................... February 5, 2004 140
Suni Sands............................................ February 5, 2004 336
Topic's............................................... February 5, 2004 230
Coachwood Colony...................................... February 5, 2004 200
Waterway.............................................. February 5, 2004 336
Desert Paradise....................................... February 5, 2004 260
Goose Creek........................................... February 5, 2004 598
NHC................................................... February 17, 2004 11,357
Viewpoint............................................. May 3, 2004 1,928
Cactus Gardens........................................ May 12, 2004 430
Monte Vista........................................... May 13, 2004 832
Carefree Cove......................................... May 14, 2004 164
Sunshine Holiday...................................... May 14, 2004 399
Las Palmas............................................ May 14, 2004 135
Parque la Quinta...................................... May 14, 2004 166
Village of the Four Seasons........................... May 14, 2004 271
JOINT VENTURES:
Lake Myers............................................ December 18, 2003 425
Pine Haven............................................ January 21, 2004 625
Twin Mills............................................ January 27, 2004 501
Plymouth Rock......................................... February 10, 2004 609
Mesa Verde............................................ May 18, 2004 345
Winter Garden......................................... May 18, 2004 350
MEZZANINE INVESTMENT:
Fiesta Grande I &II .................................. February 3, 2004 767
Tropical PalmsPalms........................................ February 3, 2004 297
Island Vista EstatesEstates.................................. February 3, 2004 617
Foothills WestWest........................................ February 3, 2004 188
CapriCapri................................................. February 3, 2004 300
Casita VerdeVerde.......................................... February 3, 2004 192
Rambler's RestRest........................................ February 3, 2004 647
Venture InInn........................................... February 3, 2004 389
ScenicScenic................................................ February 3, 2004 224
ClerbrookClerbrook............................................. February 3, 2004 1,255
Inlet OaksOaks............................................ February 3, 2004 178
EXPANSION SITE DEVELOPMENT AND OTHER:
Sites added or reconfigured in 2003................... (35)
DISPOSITIONS:
Independence Hill..................................... June 6, 2003 (203)
Brook Gardens......................................... June 6, 2003 (424)
Pheasant Ridge........................................ June 30, 2003 (101)
Lake Placid........................................... May 28, 2004 (408)
EXPANSION SITE DEVELOPMENT AND OTHER:
Sites added or reconfigured in 2003 (35)
------
TOTAL SITES AS OF MARCH 31, 2004........................... 75,416JUNE 30, 2004............................ 80,028
======
20
MANUFACTURED HOME COMMUNITIES, INC.
TRENDS
Occupancy in our Properties as well as our ability to increase rental
rates directly affectaffects revenues. In 2004,Average occupancy in our Core Portfolio
decreased 2.3%. Also during 2004, average1.8% from the prior year. Average monthly base rental rates for the
Core Portfolio increased approximately 4.7%.4.8% from the prior year. We project
continued growth during 2004 in our Core Portfolio performance. Core Portfolio
base rental-raterental rate growth is expected to be approximately 3%. These projections
would result in growth of approximately 2% to 2.5% in Core Portfolio income from
operations (also referred to as net operating income or "NOI").
22
MANUFACTURED HOME COMMUNITIES, INC.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles generally accepted in the United States,("US GAAP"), which require us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosures. We believe that
the following critical accounting policies, among others, affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
We periodically evaluate our long-lived assets, including our investments
in real estate, for impairment indicators. Our judgments regarding the existence
of impairment indicators are based on factors such as operational performance,
market conditions and legal factors. Future events could occur which would cause
us to conclude that impairment indicators exist and an impairment loss is
warranted.
Real estate is recorded at cost less accumulated depreciation.
Depreciation is computed on the straight-line basis over the estimated useful
lives of the assets. We use a 30-year estimated life for buildings acquired and
structural and land improvements, a ten-to-fifteen-year estimated life for
building upgrades and a three-to-seven-year estimated life for furniture,
fixtures and equipment. Expenditures for ordinary maintenance and repairs are
expensed to operations as incurred and significant renovations and improvements
that improve the asset and extend the useful life of the asset are capitalized
over their estimated useful life. However, the useful lives, salvage value, and
customary depreciation method used for land improvements and other significant
assets may significantly and materially overstate the depreciation of the
underlying assets and therefore understate the net income of the Company.
The valuation of financial instruments under Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments" ("SFAS No. 107") and Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133") requires us to make estimates and judgments that affect the fair value
of the instruments. Where possible, we base the fair values of our financial
instruments, including our derivative instruments, on listed market prices and
third party quotes. Where these are not available, we base our estimates on
other factors relevant to the financial instrument.
Certain costs, primarily legal costs, relative to our efforts to
effectively change the use and operations of several Properties subject to rent
control (see Note 9) are currently classified in other assets. These costs, to
the extent these efforts are successful, are capitalized to the extent of the
established value of the revised project and included in the net investment in
real estate for the appropriate Properties. To the extent these efforts are not
successful, these costs will be expensed. In addition, we capitalize certain
costs, primarily legal costs, related to entering into lease agreements which govern
the terms under which we may enter into leases with individual tenants and which
are expensed over the term of the lease agreement.
In JanuaryDecember 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46,46R, Consolidation of Variable Interest Entities ("FIN 46"46R").
The objective of FIN 4646R is to provide guidance on how to identify a variable
interest entity ("VIE") and determine when the assets, liabilities,
non-controlling interests, and results of operations of a VIE need to be
included in the company'sCompany's consolidated financial statements. A company that
holds variable interests in an entity will need to consolidate such entity if
the companyCompany absorbs a majority of the VIE's expected losses or receives a
majority of the entity's expected residual returns if they occur, or both. The
adoption of FIN 4646R had no effect on the Company in 2003 and 2004.
2321
MANUFACTURED HOME COMMUNITIES, INC.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)
We account for our stock-based compensation in accordance with SFAS No. 123
and its amendment (SFAS No. 148), "Accounting for Stock Based Compensation",
which results in compensation expense being recorded based on the fair value of
the stock option compensation issued. SFAS No. 148 provided three possible transition
methods for changing to the fair value method. Effective January 1, 2003, we
elected to use the modified-prospective method, which requiredrequires that we recognize
stock-based employee compensation cost from the beginning of the fiscal year in
which the recognition provisions are first applied as if the fair value method
had been used to account for all employee awards granted or settled in fiscal
years beginning after December 15, 1994.
COMPARISON OF THE QUARTER ENDED MARCH 31,JUNE 30, 2004 TO THE QUARTER ENDED MARCH 31,JUNE 30, 2003
Since December 31, 2002, the gross investment in real estate has increased
from $1,296 million to $1,665$1,856 million. The total number of sites owned or
controlled, or in which the Company holds an investment, has increased from
51,582 as of December 31, 2002 to 75,41680,028 as of March 31,June 30, 2004.
PROPERTY OPERATIONS:
The following table summarizes certain financial and statistical data for
the Property Operations for theour Core Portfolio and the Total Portfolio for the
quarters ended March 31,June 30, 2004 and 2003.
CORE PORTFOLIO TOTAL PORTFOLIO
------------------------------------------ ------------------------------------------
INCREASE/------------------------------------------- --------------------------------------------
INCREASE / % INCREASE/INCREASE / %
(dollars in thousands)(DOLLARS IN THOUSANDS) 2004 2003 (DECREASE) CHANGE 2004 2003 (DECREASE) CHANGE
-------- --------- ------------ ------- ----------------- --------- ---------- ------ ------- --------- -------- -------
Community base rental income ...... $50,521 $49,361income....... $ 1,160 2.4% $50,82350,562 $ 49,361 1,46249,110 $ 1,452 3.0% $ 52,854 $ 49,111 3,743 7.6%
Resort base rental income ......... 96 82 14 17.1% 12,425 4,077 8,348 204.8%income.......... 61 69 (8) (11.6)% 12,952 1,854 11,098 598.6%
Utility and other income .......... 5,419 4,931 488 9.9% 6,526 5,331 1,195 22.4%
------- -------income........... 5,024 4,940 84 1.7% 6,440 5,091 1,349 26.5%
-------- --------- ---- ------- --------- ------------ --------- -------- --------- -----
Property operating revenues .. 56,036 54,374 1,662 3.1% 69,774 58,769 11,005 18.7%revenues... 55,647 54,119 1,528 2.8% 72,246 56,056 16,190 28.9%
Property operating and
maintenance .................. 15,335 14,690 645 4.4% 21,014 16,727 4,287 25.6%maintenance................... 14,580 14,180 400 2.8% 23,769 15,818 7,951 50.3%
Real estate taxes ................. 4,801 4,401 400 9.1% 5,507 4,638 869 18.7%taxes.................. 4,833 4,505 328 7.3% 6,055 4,745 1,310 27.6%
Property management ............... 2,163 2,176 (13) (0.6%) 2,846 2,352 494 21.0%
------- -------management................ 2,226 2,189 37 1.7% 3,423 2,276 1,147 50.4%
-------- --------- ---- ------- --------- ------------ --------- -------- --------- -----
Property operating expenses .. 22,299 21,267 1,032 4.9% 29,367 23,717 5,650 23.8%
------- -------21,639 20,874 765 3.7% 33,247 22,839 10,408 45.6%
-------- --------- ---- ------- --------- ------------ --------- -------- --------- -----
Income from property operations ... $33,737 $33,107 $ 630 1.9% $40,40734,008 $ 35,052 5,355 15.3%
======= =======33,245 $ 763 2.3% $ 38,999 $ 33,217 5,782 17.4%
======== ========= ==== ======= ========= ============ ========= ======== ========= =====
Site and Occupancy Information (1):
Average total sites ............... 43,142 43,133 9 .02% 43,546 43,133 413 1.0%sites................ 43,143 43,131 12 .03% 44,601 43,131 1,470 3.4%
Average occupied sites ............ 38,925 39,802 (877) (2.3%sites............. 38,727 39,420 (693) (1.8%) 39,318 39,802 (484) (1.2%40,162 39,420 742 1.9%
Occupancy %........................ 89.8% 91.4% (1.6%) Occupancy % ....................... 90.2% 92.3% (2.1%(1.6%) (2.1%90.0% 91.4% (1.4%) 90.3% 92.3% (2.0%) (2.0%(1.4%)
Monthly base rent per site ........ $432,63 $413,39site......... $ 19.24 4.7% $430.86435.21 $ 413.39415.28 $ 17.47 4.2%19.93 4.8% $ 438.92 $ 415.28 $ 23.64 5.7%
Total sites
As of March 31, .............June 30, 2004......... 43,143 43,133 10 .02% 44,140 43,861 279 .6%43,131 12 3.8% 44,796 43,131 1,665 3.9%
Total occupied sites
As of March 31, ............. 38,882 39,729 (847) (2.1%) 39,863 40,399 (536) (1.3%)June 30, 2004......... 38,694 39,321 (627) (1.6)% 40,618 39,321 1,297 3.3%
(1) Site and occupancy information excludes Resort sites and Properties owned
through joint ventures.
2422
MANUFACTURED HOME COMMUNITIES, INC.
RESULTS OF OPERATIONS (CONTINUED)
Property Operating RevenuesPROPERTY OPERATING REVENUES
The 2.4%3.0% increase in Community base rental income for the Core Portfolio
reflects a 4.7%4.8% increase in monthly base rent per site coupled with a 2.3%1.8%
decrease in average occupied sites. The increase in utility and other income for
the Core Portfolio is due primarily to increases in utility income, which
resulted from higher expenses for these items. Total portfolio revenues reflect
the increase of resort base rental income as a result of our current year
acquisitions.
PROPERTY OPERATING EXPENSES
The increase in property operating and maintenance expense for the Core
Portfolio is due primarily to increases in property payroll, repair and
maintenance and utility expense which was partially offset by an increase in
utility income. The increase in Core Portfolio real estate taxes is generally
due to higher property assessments on certain Properties. Property Operating Expensesmanagement
expense for the Core Portfolio, which reflects costs of managing the Properties
and is estimated based on a percentage of Property revenues, remained stable.
Total portfolio expenses increased primarily due to the 2004 acquisitions.
HOME SALES OPERATIONS:
The following table summarizes certain financial and statistical data for
the Home Sales Operations for the quarters ended June 30, 2004 and 2003.
HOME SALES OPERATIONS
---------------------------------------------
(DOLLARS IN THOUSANDS) 2004 2003 VARIANCE % CHANGE
---------- ---------- ---------- --------
Gross revenues from new home sales................ $ 9,212 $ 8,651 $ 561 6.5%
Cost of new home sales............................ (8,199) (7,302) (897) (12.3%)
--------- --------- --------- ------
Gross profit from new home sales.................. 1,013 1,349 (336) (24.9%)
Gross revenues from used home sales............... 1,571 916 655 71.5%
Cost of used home sales........................... (1,147) (864) (283) (32.8%)
--------- --------- --------- ------
Gross profit from used home sales................. 424 52 372 715.4%
Brokered resale revenues, net..................... 596 454 142 31.3%
Home selling expenses............................. (2,204) (1,808) (396) (21.9%)
Ancillary services revenues, net.................. 735 (111) 846 762.2%
--------- --------- --------- ------
Income (loss) from home sales and other.......... $ 564 $ ( 64) $ 628 981.3%
========= ========= ========= ======
HOME SALES VOLUMES:
New home sales.................................. 120 118 2 1.7%
Used home sales................................. 127 57 70 122.8%
Brokered home resales........................... 408 282 126 44.7%
The average selling price of new homes increased approximately $3,500 or
4.7% compared to the same period in 2003. Used home gross profit reflects an
increase in sales volume combined with increased gross margin on used home
sales. Brokered resale revenues reflects increased sales volume. The 22.0%
increase in home selling expenses primarily reflects increased insurance costs
and other expenses. The increase in ancillary service revenue relates primarily
to 2004 acquisitions.
23
MANUFACTURED HOME COMMUNITIES, INC.
RESULTS OF OPERATIONS (CONTINUED)
OTHER INCOME AND EXPENSES:
The increase in other expenses reflects an increase in interest expense
resulting from the Recap borrowing in October 2003 and additional debt assumed
in the 2004 acquisitions, an increase in depreciation on real estate assets
related to the 2004 acquisitions, and increased general and administrative
expense due to increased payroll. This is partially offset by an increase in
interest income on short-term investments, and increased equity in income from
joint ventures resulting from the Mezzanine Investment and six 2004 joint
venture investments and a preferred return of capital as a result of a
refinancing in one of the joint ventures.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2004 TO THE SIX MONTHS ENDED JUNE
30, 2003
The following table summarizes certain financial and statistical data for the
Property Operations for the Core Portfolio and the Total Portfolio for the six
months ended June 30, 2004 and 2003.
CORE PORTFOLIO TOTAL PORTFOLIO
------------------------------------------- -----------------------------------------
INCREASE/ % INCREASE/ %
(DOLLARS IN THOUSANDS) 2004 2003 (DECREASE) CHANGE 2004 2003 (DECREASE) CHANGE
--------- --------- ---------- ------ --------- --------- ---------- ------
Community base rental income....... $ 101,085 $ 98,471 2,614 2.7% $103,665 $ 98,472 $ 5,193 5.3%
Resort base rental income.......... 157 150 7 4.7% 25,294 5,931 19,363 326.5%
Utility and other income........... 10,442 9,875 567 5.7% 12,954 10,422 2,532 24.3%
--------- --------- --------- ---- -------- --------- --------- -----
Property operating revenues... 111,684 108,496 3,188 2.9% 141,913 114,825 27,088 23.6%
Property operating and
maintenance................... 29,877 28,864 1,013 3.5% 44,728 32,545 12,183 37.4%
Real estate taxes.................. 9,635 8,910 725 8.1% 11,555 9,383 2,172 23.1%
Property management................ 4,267 4,372 (105) (2.4%) 6,269 4,628 1,641 35.5%
--------- --------- --------- ---- -------- --------- --------- -----
Property operating expenses 43,779 42,146 1,633 3.9% 62,552 46,556 15,996 34.4%
--------- --------- --------- ---- -------- --------- --------- -----
Income from property operations.... $ 67,905 $ 66,350 $ 1,555 2.3% $ 79,361 $ 68,269 $ 11,092 16.2%
========= ========= ========= ==== ======== ========= ========= =====
Site and Occupancy Information (1):
Average total sites................ 43,143 43,132 11 (0.0%) 44,164 43,132 1,032 2.4%
Average occupied sites............. 38,826 39,611 (785) (2.0%) 39,740 39,611 129 0.3%
Occupancy %........................ 90.0% 91.8% (1.8%) (1.8%) 90.0% 91.8% (1.8%) (1.8%)
Monthly base rent per site......... $ 433.92 $ 414.33 $ 19.59 4.7% $ 434.94 $ 414.33 $ 20.61 5.0%
(1) Site and occupancy information excludes Resort sites and Properties owned
through joint ventures.
PROPERTY OPERATING REVENUES
The 2.7% increase in Community base rental income for the Core Portfolio
reflects a 4.7% increase in monthly base rent per site coupled with a 2.0%
decrease in average occupied sites. The increase in utility and other income for
the Core Portfolio is due primarily to increases in utility income, which
resulted from higher expenses for these items. The increase in Total Portfolio
revenue is primarily a result of the 2004 acquisitions.
24
MANUFACTURED HOME COMMUNITIES, INC.
RESULTS OF OPERATIONS (CONTINUED)
PROPERTY OPERATING EXPENSES (CONTINUED)
The increase in property operating and maintenance expense for the Core
Portfolio is due primarily to increases in property payroll, repair and
maintenance, administrative, and insurance and other expenses. Utility expense
also increased, but was offset by an increase in utility income. The increase in
Core Portfolio real estate taxes is generally due to higher property assessments
on certain Properties. Property management expense for the Core Portfolio, which
reflects costs of managing the Properties and is estimated based on a percentage
of Property revenues, remained stable. Total Portfolio expenses increased due to
2004 acquisitions.
HOME SALES OPERATIONS:
The following table summarizes certain financial and statistical data for
the Home Sales Operations for the quarterssix months ended March 31,June 30, 2004 and 2003.
HOME SALES OPERATIONS
------------------------------------------------------
INCREASE/
(dollars in thousands)-------------------------------------------------
(DOLLARS IN THOUSANDS) 2004 2003 (DECREASE)VARIANCE % CHANGE
------- ------- ---------- ---------------------- ------------- -------- --------
Gross revenues from new home salessales.......... $ 6,79816,010 $ 3,609 $ 3,189 88.4%12,260 3,750 30.6%
Cost of new home sales ............... (6,293) (2,976) (3,317) (111.5%sales...................... (14,492) (10,277) (4,215) (41.0%)
------- ------- -------------------- ------------- ------ -----
Gross profit from new home sales ..... 505 633 (128) (20.2%sales............ 1,518 1,983 (465) (23.4%)
Gross revenues from used home sales .. 740 483 257 53.2%sales......... 2,311 1,399 912 65.2%
Cost of used home sales .............. (723) (485) (238) (49.1%sales..................... (1,870) (1,349) (521) (38.6%)
------- ------- -------------------- ------------- ------ -----
Gross profit from used home sales .... 17 (2) 19 950.0%sales........... 441 50 391 782.0%
Brokered resale revenues, net ........ 492 376 116 30.9%net............... 1,088 830 258 31.1%
Home selling expenses ................ (2,073) (1,894) (179) (9.5%expenses....................... (4,277) (3,702) (575) (15.5%)
Ancillary services revenues, net ..... 912 482 430 89.2%
------- ------- -------net............ 1,647 371 1,276 343.9%
------------- ------------- ------ Loss-----
Income (loss) from home sales and other .......other..... $ (147)417 $ (405) $ 258 63.7%
======= ======= =======(468) 885 189.1%
============ ============ ====== =====
HOME SALES VOLUMES:
New home sales ..................... 94 52 42 80.8%sales............................ 214 170 44 25.9%
Used home sales .................... 76 32 44 137.5%sales........................... 203 89 114 128.1%
Brokered home resales .............. 329 260 69 26.5%resales..................... 737 542 195 36.0%
New home sales gross profit reflects an 80.8%a 25.9% increase in sales volume
coupled with a 10.1%23.4% decrease in the gross margin due to the liquidation of
aging inventory in the West region. The average selling price of new homes
increased $3,000 or 4.3% compared to 2003.margin. Used home gross profit
reflects an increase in sales volume, partially offset by a decrease in gross margin on used home sales.sales, along with increased
sales volume. Brokered resale revenues reflects increased salesreflect an increase in volume. The 9.5%15.5%
increase in home selling expenses primarily reflects increased insurance costs.
Thean increase in ancillary service revenues primarily relates to the NHC
acquisition.sales
volumes and insurance expense.
25
MANUFACTURED HOME COMMUNITIES, INC.
RESULTS OF OPERATIONS (CONTINUED)
OTHER INCOME AND EXPENSES:
The increasedecrease from the six months ended June 30, 2004 versus the same
period a year earlier in other income and expenses reflects increased interest
income on short-term investments, increased equityan increase in
income from joint ventures resulting from the Mezzanine Investment and four 2004 joint venture investments,
and the gain on sale of a vacant land parcel at Casa Village. Partially
offsetting the increase isoffset by an increase in general and administrative
expense, interest expense resulting from the
$501 million borrowing in October, 2003 and additional debt assumed in the 2004
acquisitions, an increase in depreciation on real estate assets relatedmainly due to the 2004 acquisitions
and increased general and administrative expense due to
increased payroll.the Recap in October 2003.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
As of March 31,June 30, 2004, the Company had $17.4$9.4 million in cash and cash
equivalents and $75$97 million available on its line of credit. The Company expects
to meet its short-term liquidity requirements, including its distributions,
generally through its working capital, net cash provided by operating activities
and availability under the existing line of credit. The Company expects to meet
certain long-term liquidity requirements such as scheduled debt maturities,
property acquisitions and capital improvements by long-term collateralized and
uncollateralized borrowings including borrowings under its existing line of
credit and the issuance of debt securities or additional equity securities in
the Company, in addition to working capital.net cash provided by operating activities.
INVESTMENT IN AND ADVANCES TO JOINT VENTURES
On February 3, 2004, the Company invested approximately $29.7 million in
preferred equity interests (the "Mezzanine Investment") in six entities
controlled by Diversified Investments, Inc. ("Diversified"). These entities own
in the aggregate 11 properties, containing 5,054 sites. Approximately $11.7
million of the Mezzanine Investment accrues at a per annum average rate of 10%,
with a minimum pay rate of 6.5%, payable quarterly, and approximately $17.9
million of the Mezzanine Investment accrues at a per annum average rate of 11%,
with a minimum pay rate of 7%, payable quarterly. To the extent the minimum pay
rates on the respective Mezzanine Investments are not achieved, the accrual
rates increase to 12% and 13%, respectively. The Company can acquire these
properties in the future at capitalization rates of between 8% and 8.5%,
beginning in 2006. In addition, the Company has invested approximately $1.4
million in the Diversified entities managing these 11 properties, which is
included in prepaid expenses and other assets on the Company's Consolidated
Balance Sheet as of March 31,June 30, 2004.
During the quartersix months ended March 31,June 30, 2004, the Company invested
approximately $1.4$2.1 million with Diversified in foursix separate property owningproperty-owning
entities. The Company can acquire these properties in the future at
capitalization rates of between 8% and 8.5%, beginning in 2006.
In addition, the Company recorded approximately $584,000$1.9 million and $353,000$1.1
million of net income from joint ventures in the quarterssix months ended March 31,June 30, 2004
and 2003, respectively, and received approximately $341,000$2.4 million and $167,000$0.7 million
in distributions from these joint ventures for the six months ended June 30,
2004 and 2003, respectively. Included in these distributions for the quarterssix months
ended March 31,June 2004 is a $1.5 million return of capital, of which $531,000 exceeded
the Company's basis and 2003, respectively.thus was recorded in income from joint ventures. Due to
the Company's inability to control the joint ventures, the Company accounts for
its investment in the joint ventures using the equity method of accounting.
26
MANUFACTURED HOME COMMUNITIES, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
ACQUISITIONS
During the quartersix months ended March 31,June 30, 2004, we acquired 4351 Properties as
listed in(See
footnote 4 of the table below.unaudited interim financial statements). The combined real
estate investment in these 4351 properties was approximately $345$530 million and was
funded with monies held in short-term investments and additional debt.
(amounts in millions, except for total sites)
PURCHASE NET
CLOSING DATE PROPERTY LOCATION TOTAL SITES PRICE DEBT EQUITY
- ----------------- ----------------- ---------------- ----------- ----------- -------- -----------
ACQUISITIONS:
January 15, 2004 O'Connell's (a) Amboy, IL 668 $ 6.6 $ 5.0 $ 1.6
January 30, 2004 Spring Gulch (a) New Holland, PA 420 6.4 4.8 1.6
February 3, 2004 Paradise (a) Mesa, AZ 950 25.7 20.0 5.7
February 18, 2004 Twin Lakes (a) Chocowinity, NC 400 5.2 3.8 1.4
February 19, 2004 Lakeside (a) New Carlisle, IN 95 1.7 --- 1.7
February 5, 2004 Shangri La Largo, FL 160 (b) 4.5 (b)
February 5, 2004 Terra Ceia Palmetto, FL 203 (b) 2.6 (b)
February 5, 2004 Southernaire Mt. Dora, FL 134 (b) 2.1 (b)
February 5, 2004 Sixth Avenue Zephryhills, FL 140 (b) 2.3 (b)
February 5, 2004 Suni Sands Yuma, AZ 336 (b) 3.2 (b)
February 5, 2004 Topic's Spring Hill, FL 230 (b) 2.2 (b)
February 5, 2004 Coachwood Colony Leesburg, FL 200 (b) 4.3 (b)
February 5, 2004 Waterway Cedar Point, NC 336 (b) 6.3 (b)
February 5, 2004 Desert Paradise Yuma, AZ 260 (b) 1.5 (b)
February 5, 2004 Goose Creek Newport, NC 598 (b) 12.6 (b)
February 17, 2004 NHC Portfolio (c) Various 11,357 235.0 159.0 69.0
(a)26
MANUFACTURED HOME COMMUNITIES, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
ACQUISITIONS (CONTINUED)
We assumed inventory of approximately $419,000,$1.2 million, other assets of $4.9
million, rents received in advance of approximately $2.4$13.6 million and other
liabilities of approximately $432,000$5.8 million in connection with the 2004
acquisitions.
On February 17, 2004, the Company paid $69 million to acquire 93% of PAMI
entities' interests and as such included the acquisition of
O'Connell's, Spring Gulch, Paradise, Twin Lakes and Lakeside (the
"Other 2004 Acquisitions").
(b) The portfolio was acquired for a total purchase price of $64
million and $20.9 million of net equity. The transaction was funded
partially through loans obtained on the individual properties as shownits results from
operations in the table. In addition, we assumed approximately $1.1 million of
rents received in advance and approximately $421,000 of other
liabilities.
(c) The NHC Portfolio consists of 28 vacation resort properties,
containing 11,357 sites. Twenty of the properties are located in
Florida, six in Texas, and two in California.its consolidated financial statements at that time. The
acquisition was funded with monies held in short-term investments and $50
million drawn from the Company's line of credit. BeginningPAMI filed a lawsuit disputing
the authority of NHC to enter into the transaction with the Company and a trial
was held in 1996,mid-April 2004. On June 21, 2004, the Court of Chancery for the
State of Delaware in Civil Action No. 259-N issued a series of
partnerships were formed between "NHC" entities and "PAMI" (the former
General Partner of NHC) entities. A trial on all claims between NHC and
PAMI, including whetherMemorandum Opinion
affirming NHC had the authority to consummateenter into the transaction with the CompanyCompany.
On May 28, 2004, a property located in Lake Placid, Florida was heldsold for a
selling price of $3.4 million, with net proceeds of $0.8 million received
mid-July, and no gain or loss on April 15 and 16, 2004.disposition was recognized. The Company continues to believeoperating
results have been reflected in the merit of NHC's claims and defenses.
Under the terms and conditions of the partnership agreements, on
February 17, 2004, $69 million was paid to acquire the PAMI entities'
interests. Principals of the NHC entities will continue to operate the
properties under a management agreement with the Company and maintain
an approximate 7% equity position in the new entity. The existing
dispute is related to the PAMI entities' desire to liquidate their
investments. The Company, after advice from its legal counsel, believes
that there is substantial merit to its' position that the NHC Portfolio
transaction is valid. Accordingly, the Company has treated the NHC
Portfolio transaction as an acquisition in the financial statements.
27
MANUFACTURED HOME COMMUNITIES, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)discontinued operations.
MORTGAGES AND CREDIT FACILITIES
Throughout the quartersix months ended June 30, 2004 the Company borrowed $50$81
million on its line of credit and paid down $15$18 million on the line of credit.
The line of credit bears interest at a per annum rate of LIBOR plus 1.65%.
In conjunction with per
annum.
During the acquisition ofsix months ended June 30, 2004, the NHC portfolio, wecompany assumed the NHC MortgagesMortgage
and other debt of approximately $156.7$157 million, which was recorded at fair market
value with the related premium being amortized over the life of the loan using
the effective interest rate. The NHCcompany borrowed an additional $190 million of
mortgage debt for other acquisitions. The Mortgages bear interest at a weighted
average interest rate ofrates ranging
from 5.14% to 5.81% per annum, amortizes over 30 years and maturesmature at various dates through November 1,
2027. We assumed debt of approximately $75.2
million related to the Other 2004 Acquisitions, with interest rate ranging from
5.25% to 5.81% and maturity dates through March 1, 2014.
Certain of the Company's mortgage and credit agreements contain covenants
and restrictions including restrictions as to the ratio of secured or unsecured
debt versus encumbered or unencumbered assets, the ratio of fixed
charges-to-earnings before interest, taxes, depreciation and amortization
("EBITDA"), limitations on certain holdings and other restrictions.
As of March 31,June 30, 2004, we were subject to certain contractual payment
obligations as described in the table below (dollars in thousands).
We are not
subject to capital lease obligations or unconditional purchase obligations as of
March 31, 2004.
Contractual Obligations TotalCONTRACTUAL OBLIGATIONS TOTAL 2005 2006 2007 2008 2009 Thereafter
-THEREAFTER
----------------------- ----- ---- ---- ---- ---- ---- ----------
Long Term DebtBorrowings (1)........ $1,331,387 $69,381 $66,865 $294,189 $207,141 $69,685 $624,126 $1,469,380 $66,831 $94,762 $291,475 $197,535 $45,882 $772,895
Weighted average interest
rates................... 6.7% 4.7% 4.4% 6.7% 5.5% 6.8% 6.4%rates.................... 6.36% 6.60% 4.11% 7.33% 5.70% 6.44% 6.48%
(1) Balance excludes net premiums and discounts of $10.9$10.8 million.
Included in the above table are certain capital lease obligations totaling
approximately $7.0 million. These agreements expire June 2009 and are paid
semi-annually.
27
MANUFACTURED HOME COMMUNITIES, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
MORTGAGES AND CREDIT FACILITIES (CONTINUED)
In addition, the Company leases land under non-cancelable operating leases
at certain of the Properties expiring in various years from 2022 to 20312032 with
terms which require twelve equal payments perinclude minimum rent to be paid throughout the year plus additional
rents calculated as a percentage of gross revenues. For the quarterssix months ended
March 31,June 30, 2004 and 2003, ground lease rentexpense was approximately $400,000, respectively.$450,000. Minimum
future rental payments under the ground leases are approximately $1.6$1.7 million
for each of the next five years and approximately $26.3$30.1 million thereafter.
CAPITAL IMPROVEMENTS
Capital expenditures for improvements are identified by the Company as
recurring capital expenditures ("Recurring CapEx"), site development costs and
corporate costs. Recurring CapEx was approximately $2.7$6.5 million for the quartersix
months ended March 31,June 30, 2004. Site development costs were approximately $2.6$5.7
million for the quartersix months ended March 31,June 30, 2004, and represent costs to develop
expansion sites at certain of the Company's Properties and costs for
improvements to sites when a smaller used home is replaced with a larger new
home. Corporate costs were approximately $118,000$200,000 for the quartersix months ended March 31,June
30, 2004.
28
MANUFACTURED HOME COMMUNITIES, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
EQUITY TRANSACTIONS
On January 16, 2004, we paid a one-time special distribution of $8.00
per share payable to stockholders of record on January 8, 2004. We used proceeds
fromIn connection with the $501 million borrowing and subsequent special
distribution, on February 27, 2004, the Company contributed all of its assets to
MHC Trust, a newly formed Maryland real estate investment trust, including the
Company's entire partnership interest in October, 2003MHC Operating Limited Partnership. In
exchange for its contribution, the Company was issued all of the outstanding
shares of MHC Trust. As a result of the restructuring, MHC will continue to
payqualify as a real estate investment trust under the special
distribution. The special cash dividendCode, with its assets
consisting of interests in MHC Trust. MHC Trust, in turn, will also qualify as a
real estate investment trust under the Code and will be reflected on stockholders'the general partner of
the Operating Partnership. On May 1, 2004, 1099-DIVin connection with the restructuring,
MHC sold cumulative preferred stock ("Series A & B preferred stock") to becertain
unaffiliated investors.
On May 13, 2004, the Company issued 1.1 million OP units valued at $32.2
million in January, 2005.connection with the acquisition of the Monte Vista property.
On April 9, 2004, the Company paid a $.0125$0.0125 per share distribution for
the quarter ended March 31, 2004 to stockholders of record on March 26, 2004. On
July 9, 2004 the Company paid a $0.0125 per share distribution for the quarter
ended June 30, 2004 to stockholders of record on June 25, 2004. The Operating
Partnership paid distributions of 9.0% per annum on the $125 million of Series D
Cumulative Redeemable Perpetual Preferred Units ("Preferred Units").
Distributions on the Preferred Units were paid on March 31, 2004 and June 30,
2004. On June 30, 2004 approximately $8,000 of the $11,915 cumulative
distribution has been paid on the Series A & B preferred stock.
INFLATION
Substantially all of the leases at the Properties allow for monthly or
annual rent increases which provide the Company with the opportunity to achieve
increases, where justified by the market, as each lease matures. Such types of
leases generally minimize the risk of inflation to the Company.
28
MANUFACTURED HOME COMMUNITIES, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
FUNDS FROM OPERATIONS
Funds From Operations ("FFO"), a non-GAAP financial performance measure,
was redefined by the National Association of Real Estate Investment Trusts
("NAREIT") in April 2002, as net income (computed in accordance with GAAP),
before allocation to minority interests, excluding gains (or losses) from sales
of property, plus real estate depreciation and after adjustments for
unconsolidated partnerships and joint ventures. The Company computes FFO in
accordance with the NAREIT definition, which may differ from the methodology for
calculating FFO utilized by other equity REITs and, accordingly, may not be
comparable to such other REITs' computations. The Company believes that FFO is
useful to investors as a measure of the performance of an equity REIT because,
along with cash flows from operating activities, financing activities and
investing activities, FFO provides investors an understanding of the ability of
the Company to incur and service debt and to make capital expenditures. FFO does
not represent cash generated from operating activities in accordance with GAAP
and therefore should not be considered an alternative to net income as an
indication of the Company's performance or to net cash flows from operating
activities as determined by GAAP as a measure of liquidity and is not
necessarily indicative of cash available to fund cash needs.
The following table presents a calculation of FFO for the quarters and six
months ended March 31,June 30, 2004 and 2003 (amounts in thousands):
QUARTERS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ---------------------
2004 2003 2004 2003
---------- ---------- --------- ----------\---------
COMPUTATION OF FUNDS FROM OPERATIONS:
Net income available for Common Shares......................common shares................. $ 4,976658 $ 7,67214,400 $ 5,634 $ 22,072
Income allocated to Commoncommon OP Units......................... 1,156 1,847Units.................... 181 3,444 1,337 5,291
Depreciation on real estate assets and other costs.......... 10,682 8,904assets..................... 12,305 9,687 22,974 18,591
Depreciation expense included inon discontinued operations....real estate assets........ 18 --- 32 129
Gain on the sale of Properties and other........................other............... --- (10,826) (638) ---(10,826)
---------- ---------- --------- ---------
Funds from operations.....................................operations available for common shares.... $ 16,17613,162 $ 18,55216,705 $ 29,339 $ 35,257
========== ========== ========= =========
Weighted average Common Shares outstanding - diluted........ 28,521 27,740diluted 29,142 27,965 28,840 27,853
========== ========== ========= =========
29
MANUFACTURED HOME COMMUNITIES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Our earnings are affected by changes in interest rates, since a portion of
our outstanding indebtedness is at variable rates based on LIBOR. Our Line of
Credit ($3563 million outstanding at March 31,June 30, 2004) bears interest at LIBOR plus
1.65%, per annum. If LIBOR increased/decreased by 1.0% during the quartersix months
ended March 31,June 30, 2004, interest expense would have increased/decreased by
approximately $55,000$133,000 based on the average balance outstanding under the
Company's Line of Credit during the period.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures as of March 31,June 30, 2004. Based
on that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective as of March 31,June 30, 2004. There were no material changes in the Company's
internal control over financial reporting during the first quartersix months ended June 30,
2004.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(see Note 9 of the Consolidated Financial Statements contained herein)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
31.1 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes -
OxleySarbanes-Oxley Act of 2002
32.1 Certification of Chief Financial Officer Pursuant to 19 U.S.C.
Section 1350
32.2 Certification of Chief Executive Officer Pursuant to 19 U.S.C.
Section 1350
(b) Reports on Form 8-K:
Form 8-K dated and filed January 27,April 20, 2004, relating to Item 7 -
"Financial Statements and Exhibits" and Item 9 -
"Regulation FD Disclosure" regarding release of
Earnings Results for the yearquarter ended DecemberMarch 31, 2004.
Form 8-K8-K/A dated and filed January 27, 2004, relating
to Item 5 - "Other Events and Regulation FD
Disclosure" announcing the appointment of Joe
McAdams to the Board of Directors.
Form 8-K dated and filed January 27, 2004, relating
to Item 5 - "Other Events and Regulation FD
Disclosure" announcing an agreement with Monte
Vista, LLC.April 30,
MANUFACTURED HOME COMMUNITIES, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(b) Reports on Form 8-K (continued):
Form 8-K dated and filed February 18, 2004, relating
to Item 5 - "Other Events and Regulation FD
Disclosure" announcing the tender of payment on
the NHC portfolio.
Form 8-K dated and filed February 18, 2004, relating
to Item 5 - "Other Events and Regulation FD
Disclosure" announcing investments pursuant to
the acquisition program.
Form 8-K dated and filed March 2, 2004, relating to Item 2 -
"Acquisition of Assets" and Item 7 - "Financial
Statements and Exhibits" regarding the acquisition and
investment in 30 Properties.58 properties.
Form 8-K dated and filed March 3, 2004, relating to
Item 2 - "Acquisition of Assets" and Item 7 -
"Financial Statements and Exhibits" regarding the
acquisition of the NHC portfolio.
Form 8-K dated and filed March 3,May 6, 2004, relating to Item 5 -
"Other Events and Regulation FD Disclosure" announcing
the declaration of First
Quarterthe second quarter 2004 dividenddividend.
30
MANUFACTURED HOME COMMUNITIES, INC.
Form 8-K dated and appointmentfiled May 18, 2004, relating to Item 5 -
"Other Events and Regulation FD Disclosure" announcing
the acquisition of Thomas
P. Heneghaneight properties.
Form 8-K dated and filed June 23, 2004, relating to Item 5 -
"Other Events and Regulation FD Disclosure" announcing
the settlement of litigation related to the Boardacquisition
of Directors.the NHC Portfolio.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MANUFACTURED HOME COMMUNITIES, INC.
BY: /s/ Thomas P. Heneghan
------------------------------------------------------------------------------
Thomas P. Heneghan
President and Chief Executive Officer
(Principal Executive Officer)
BY: /s/ Michael B. Berman
------------------------------------------------------------------------------
Michael B. Berman
Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
DATE: May 10,August 9, 2004
32